Calgary Alberta - In 2001, U.S. regulators imposed a seemingly insurmountable condition on big railroad mergers: A deal had to not only
preserve competition, but actually enhance it.
This may seem laughable at first glance.
How often does a combination of two companies result in more competition, after all?
But as Canadian Pacific Railway Ltd. details its US$28.4 billion proposal to acquire Virginia-based Norfolk Southern Corp., analysts and the company itself are
saying the hurdles are high, but not impossibly so.
"Is it possible? Sure, but there would have to be a lot more flesh on the bones (of the deal) for it to actually get approved," said one prominent
U.S. rail lawyer who asked not to be named because he's not authorized to speak to the media.
On Wednesday, CP released the letter CEO Hunter Harrison sent to his counterpart at NS, Jim Squires, following a face-to-face meeting between the two
executives last week.
In it, Harrison says the cash-and-stock deal will create "an integrated transcontinental railroad with the scale and reach to deliver unsurpassed levels
of safety and service to our customers and communities while also increasing competition and creating significant shareholder value."
With his talk of "increasing competition", Harrison is clearly trying to win over the U.S. Surface Transportation Board (STB) and its pro-competitive
merger rule.
CP said the combined company would not only give shippers a greater choice of connections with other railroads along its network, but it would also allow
another railroad to operate on its tracks and into its terminals if the combined CP-NS "failed to provide adequate service or competitive
rates."
It also said a deal would help alleviate congestion in Chicago, a major rail bottleneck, by channeling traffic away from the city.
These concessions will help, but may not be enough to convince the STB to approve the deal, said the rail lawyer.
"A lot will depend on the reaction of other players, including the other railroads," he said.
Since the STB imposed a temporary moratorium on mergers in 2000 and came out with new rules in 2001, no successful deals have been completed between Class 1
railroads, of which there are only seven in North America.
Part of the reason is the long-held assumption that one merger would prompt others and, if left unchecked, the North American rail industry could quickly
shrink from seven big players to just two.
And it's not just the other railroads that the STB would have to contend with, it's all the other stakeholders, too, including labour and
shippers.
"Any time you open a merger in this business, it's open season for anybody and anyone, who has an issue with railroads to try to get their pound of
flesh," said Tony Hatch, principal at railway consulting firm ABH Consulting.
"They can make a deal that the STB would approve, the open question is, is that deal worth it?"
The deal would also have to be approved by Canada's transportation minister.
Although there wouldn't be the same competitive concerns, since NS has a very small presence in Canada, the headquarters of the combined company could be a
sticking point, Hatch said.
CP is currently based in Calgary.
First, though, CP will have to win over NS.
The target company said Tuesday that it will evaluate the offer, but seemed distinctly unenthused, calling it "low-premium" and saying it would face
"significant regulatory hurdles".
Shares in both companies jumped on the news, however.
CP's stock gained 5.6 percent to close at $194.94 in Toronto on Wednesday, NS rose 6.3 percent to US$92.49 in New York.
RBC analyst Walter Spracklin said he believes "a hostile take-out is not an option", and CP may be trying to encourage shareholders to put pressure
on the board.
Whatever happens, it will take a long time before a deal gets done, if it gets done at all, and Harrison, who is 71-years-old and has been coping with health
issues, has said repeatedly that he plans to retire in 2017.
"How much more can we squeeze out of the man. How many more years?" Hatch asked.
Kristine Owram.
