CP+CSX

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CP+CSX

Postby Engineer Spike » Mon Oct 13, 2014 6:08 am

Supposedly CP offered to merge with CSX, but CSX turned them down. I wonder if CP and or Jackman can buy enough shares to force it?
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Re: CP+CSX

Postby Gilbert B Norman » Mon Oct 13, 2014 2:43 pm

First, for ready reference here is discussion of the proposal over at the CSX Forum:

viewtopic.php?f=53&t=157804

In addition to the coverage noted by The Wall Street Journal over at the CSX Forum, here is coverage from The New York Times. That the two leading nationally circulated newspapers have covered this story, there must be some substance to it:

http://dealbook.nytimes.com/2014/10/12/ ... re-to-csx/

Brief passage:

It could also provide a big victory for the activist investor William A. Ackman, who joined Canadian Pacific’s board after a contentious proxy fight and whose hedge fund, Pershing Square Capital Management, has a big stake in the company.

Canadian Pacific, with a market value of about $32.5 billion, has rail lines that stretch across Canada and into the United States. CSX has a market value of about $30 billion and controls a network of lines throughout the Eastern United States.

With minimal geographic overlap, the two companies would have a huge combined footprint. But there are potential obstacles to a deal


Since BNSF/CN went nowhere, let's examine how this "Chessie and Beaver" proposal differs. The main difference I see is that BNSF/CN would have eliminated one competitive Transcon route. Agricultural shippers in the Dakota presently have competitive routings, of sorts. If SOO (CP) is not providing adequate service, then there is BNSF. A merger of those two would have left shippers without the competitive routings, again of sorts. This is not an issue with a CP/CSX combination.

Now let's look at crude; that which originates presently on the SOO would enjoy single carrier service to any East Coast refinery or transloading facility such as Albany. There would be additional opportunities to establish transloading at a Tidewater port, especially if coal traffic continues to diminish. This would become important if export restrictions on US crude were to be relaxed so that Europe would have sources other than "Vladimir the Great".

But I personally hold (but DO note the disclaimer) that the CP-KCS proposal addressed at another topic at this Forum by Engineer Spike would be a more attainable expansion into US markets for CP. The "Surf Board" (STB), in that they allowed CN/IC, would be hard pressed to disallow the other major Canadian road to establish the "T-Bone" allowed to "the other guys". But KCS represents a more arduous route to the Gulf as well as only one port (Port Arthur) where CN (IC) has two (New Orleans and Mobile). Of course, IC must compete directly with barge traffic on "Ol' Man River", but then water and pipeline traffic cannot be diverted as readily as can rail. In addition to serving Chicago over "my" MILW, KCS also has a Kansas City interchange not enjoyed by CN/IC.

The CP/CSX proposal may have no more shelf life than did CN/BNSF; but if it does it will indeed be interesting to watch.

disclaimer: author holds long positions CSX KSU UNP
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Re: CP+CSX

Postby Gilbert B Norman » Tue Oct 14, 2014 9:00 am

Fred Frailey has blogged at TRAINS with insightful thoughts regarding the CP/CSX proposal:

http://cs.trains.com/trn/b/fred-frailey ... nce-s.aspx

Brief passage:

You are entitled to believe that mergers in the railroad industry are driven by broad economic forces. I believe they are driven by the ambitions of men. The news today that Canadian Pacific has approached CSX regarding a merger appears to bear me out.

A young chief executive of a successful business is the last person you want to ask to sell. Why should the younger CEO give up the possibility of years of accomplishment and executive bonuses? The answer is that he won't unless backed against a wall. Canadian Pacific's president and soon to be CEO, Keith Creel, is in his mid 40s. His boss, chairman Hunter Harrison, has said for years that additional mergers are both inevitable and good for the railroad industry, in that they would break down the east-west wall that roughly follows the Mississippi River. By all accounts, Creel is eager to make a name outside the shadow of his mentor, Harrison. So CP's approach to CSX makes perfect sense.

But look who else is primed to act. At BNSF Railway, CEO Carl Ice and executive chairman Matt Rose are in their 50s. They are not directly affected by Wall Street's short-term outlook, either, being owned by conglomerate Berkshire Hathaway. Plus, they have Berkshire's huge trove of cash and sterling credit rating at their backs. And at Canadian National is Claude Mongeau, barely turned age 50 and a veteran at buying and absorbing regional railroads (Wisconsin Central, Elgin Joliet & Eastern, British Columbia Rail, among a host of others). Together, these railroads all have reasons to be buyers because they are led by men who feel they have a future before them.

Now look at the possible sellers. Michael Ward at CSX, Jack Koreleski at Union Pacific, Wick Moorman at Norfolk Southern, and David Starling at Kansas City Southern are all one to four years from the normal retirement age of 65. Each might be willing to listen to an offer that makes sense to their shareholders and makes sense as a future business combination. Most if not all of these CEOs have heirs apparent--Wick has Jim Squires, Michael has Oscar Munoz and Jack has Lance Fritz, for example--but the reality is that boards of directors listen to who has the top job now, not those who seek it later.


I can't say I totally "buy" Mr. Frailey's thoughts that mergers are largely brought about by greed, ego, and reenacting playground games of "I'm bigger than you are". Not all railroad mergers have been flops. It would be hard to call that of Conrail such, or for that matter, BNSF, but on the other hand within transportation, I think a few airline managers have quickly learned there is more to a merger than painting airplanes.

Additionally, The Wall Street Journal today has further coverage of the proposal:

http://online.wsj.com/articles/canadian ... 1413243531

Brief passage:

E Hunter Harrison is the only railroad boss in favor of consolidation.

And while CSX didn’t accept CP Chief Executive Hunter Harrison ’s approach last week, that is unlikely to be the last word.

People familiar with the talks between CP and CSX, reported Sunday by The Wall Street Journal, said discussions are still possible between the two.

“This conversation has been going on in every board room in the rail business,” one of the people said. “Everybody has been running numbers. We’re dealing with a rail network that’s not boundless in its infrastructure. You can take an existing infrastructure and make it work better.”

While Mr. Harrison favors railroad consolidation, many competitors, shippers and analysts worry that mergers could aggravate congestion delays and raise costs. Some shippers blame previous mergers for continued traffic problems, which have been exacerbated by growing amounts of crude oil being shipped by rail.

“I think it’s a common belief that now would not be a good time,” said a top executive at a major railroad, “because of the regulatory change that would accompany it and the upheaval it would cause the industry.”

Mr. Harrison—who also has run CP’s bigger rival, Canadian National Railway Co. —believes consolidation would help untangle and streamline the rail infrastructure. Were CP and CSX to combine, that would, for example, allow a single railroad to deliver coal from mine to utility, reducing handoffs and inefficiency.

Chicago is likely central to Mr. Harrison, who was brought in by activist investor William Ackman to run CP after a 2012 proxy fight. By combining the CSX and CP rail networks, trains would be able to move around the congested Midwestern gateway without the need to hand trains over to another carrier. That takes anywhere between 15 to 42 hours, according to recent data from the Association of American Railroads


All told, in order to win US regulatory approval, the burden will be on the proponents to establish that shipper, and by succession public, benefits will be attained from the combination. "Talk the talk" with regards to Chicago interchange congestion will only go so far. Even though both "Canadians" control two of the Chicago "Belts" (CN The "J"; CP -75% - "Harbor"), there have been reports that interchange time is no better over those routings than other. I will not easily forget my first railroad ride to Chicago during April 1961 aboard B&O Capitol Limited and observing the myriad of "diamonds" over which the train traveled accessing Chicago. Even then, I wondered how is traffic efficiently moved to and through "the railroad capital". With railroads handling (a guess) three times the volume of traffic today, the problems are simply "doubled vulnerable in No-Trump". Any further combinations within the railroad systems will simply have to establish - and deliver - public benefit; otherwise "DOA".
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Re: CP+CSX

Postby JayBee » Tue Oct 14, 2014 12:07 pm

Gilbert B Norman wrote:
All told, in order to win US regulatory approval, the burden will be on the proponents to establish that shipper, and by succession public, benefits will be attained from the combination. "Talk the talk" with regards to Chicago interchange congestion will only go so far. Even though both "Canadians" control two of the Chicago "Belts" (CN The "J"; CP -75% - "Harbor"), there have been reports that interchange time is no better over those routings than other. I will not easily forget my first railroad ride to Chicago during April 1961 aboard B&O Capitol Limited and observing the myriad of "diamonds" over which the train traveled accessing Chicago. Even then, I wondered how is traffic efficiently moved to and through "the railroad capital". With railroads handling (a guess) three times the volume of traffic today, the problems are simply "doubled vulnerable in No-Trump". Any further combinations within the railroad systems will simply have to establish - and deliver - public benefit; otherwise "DOA".


CP does not control the "Harbor", no one does. CP owns 49% , NS and CSX own 25.5% each. There is some speculation that CP will trade the Southern portion of the D&H (plus possibly some cash) for NS' share of the Harbor, and it is also speculated that CSX would sell its portion of the Harbor to make CP go away, CSX would then have some extra cash to make improvements on it's railroad.
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Re: CP+CSX

Postby Gilbert B Norman » Tue Oct 14, 2014 3:54 pm

You raise a good point, Mr. JayBee; I was jumping the gun and presuming that if this merger is approved, CSX-CP would have majority ownership of The Harbor.

But presently, with or without control of Harbor, CP (MILW) traffic has reportedly been badly delayed in interchange to either Kitty or Horsey.
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Re: CP+CSX

Postby mtuandrew » Tue Oct 14, 2014 7:10 pm

Gilbert B Norman wrote:You raise a good point, Mr. JayBee; I was jumping the gun and presuming that if this merger is approved, CSX-CP would have majority ownership of The Harbor.

But CSX already owns BOCT. Isn't that a major conflict of interest to own two of the three Chicago belts? I'd look to NS grabbing a larger share of the Harbor if a merger goes through.

Also, I will be interested to see if CP actually sells the D&H (to the NS or to anyone else) now that CSX said "no."
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Re: CP+CSX

Postby poppyl » Tue Oct 14, 2014 8:21 pm

mtuandrew wrote:
Gilbert B Norman wrote:You raise a good point, Mr. JayBee; I was jumping the gun and presuming that if this merger is approved, CSX-CP would have majority ownership of The Harbor.

But CSX already owns BOCT. Isn't that a major conflict of interest to own two of the three Chicago belts? I'd look to NS grabbing a larger share of the Harbor if a merger goes through.

Also, I will be interested to see if CP actually sells the D&H (to the NS or to anyone else) now that CSX said "no."


But remember, we are talking about the sale of the D&H south of Schenectady with CP retaining the north end for oil shipments into Albany. From a purely operational standpoint, does CP still want/need the southern part after ceasing service to Philly? I guess there could be some value in running down the R&N/NS to Allentown but is that worth the cost of ownership of the entire southern portion to Sunbury?

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Re: CP+CSX

Postby Engineer Spike » Tue Oct 14, 2014 9:11 pm

This has sparked some good conversation! A few years ago I read The Men Who Loved Trains, by Rush Loving. This started me thinking about the round of mergers of the early 1980s era. Southern approached MP, UP ended out bidding them. Seaboard and Chessie formed CSX, and Southern ended up with N&W. My first thought is will this move start the next round of mergers? I'm sure the announcement made all of the class 1 lines think about whom to marry so they don't get shut out by neighboring mega systems.

CP is small. Only KCS is smaller. CN, their largest competition has been expanding. CP lacks its own routes in two areas, Chicago-Detroit/Windsor, and Buffalo-Atlantic coast. CSX could give those routes, plus more penetration in eastern markets than the D&H can. CP may try to eat before it's eaten. CSX shares are cheap compared to the others.

Another question is whether Hunter has consulted Ackman (sorry my spell corrector second guessed me in my last post) about a proxy fight at CSX. He could repeat his move which ousted Fred Green from CP. They could then install a board which would favor merger? Is CSX financially weakened from the hostile takeover attempt of 5-7 years ago?

The CN-BNSF merger was flawed for one other reason besides the good point made by Mr. Norman. Is was just after the meltdowns caused by UP-SP, and Conrail split. The meltdowns are all but forgotten about. Many of the managers of the customers involved, and STB staff have likely retired in the 15 year span, since the last big round of mergers.Those are all now fully digested. The time may be right. CP-CSX could give true transcontinental service, and avoid Chicago. They would have that option, but could go all in Canada to Buffalo, or via Montreal and D&H.

While discussing this with member CPF363, I was reminded of the Billy Joel song, We Didn't Start the Fire. One of my relatives was an attorney. He did much of the legal work in founding the Connecticut Western 140 years ago. It briefly became part of Reading, then Central New England, New Haven, Penn Central, Conrail.....,... The point is a new round of mergers is eventually inevitable.

Contrary to my last statement, when does it get to the point of the railroads becoming too large a monopoly. Will there ever be a point where the pendulum swings the other way, and the mergers are undone, much like the Bell System? For the time being, I enjoy watching the chess game unfold, as fewer and fewer companies carve up the railroad infrastructure.

I wonder if the KCS deal which was mentioned is still viable. The threat of Mexico's revocation of the franchise comes to mind. The former Milwaukee Road line to KC would need lots of work to handle that kind of traffic increase. KC is the only point where the two companys' lines meet.
Last edited by Engineer Spike on Wed Oct 15, 2014 10:49 am, edited 2 times in total.
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Re: CP+CSX

Postby JayBee » Tue Oct 14, 2014 10:17 pm

mtuandrew wrote:But CSX already owns BOCT. Isn't that a major conflict of interest to own two of the three Chicago belts? I'd look to NS grabbing a larger share of the Harbor if a merger goes through.

Also, I will be interested to see if CP actually sells the D&H (to the NS or to anyone else) now that CSX said "no."


B&OCT is not a full Belt Railroad, it has Trackage Rights over the Harbor to reach the UP at Proviso and the CP at Bensenville.

Remember that Conrail also said "No" to NS twice before the Railroad was split between NS and CSX.
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Re: CP+CSX

Postby johnpbarlow » Wed Oct 15, 2014 5:13 am

Pages 20-21 of CP's 2014 Investor Book shows Average Tonnage Density per route (Gross Ton Miles per route mile) for the existing CP network in Canada and US. The D&H south of Schenectady and the former ICE between Sabula, IL and KC are at the lowest level of their routes at up to 15M GTMs per route mile so it's fairly obvious why D&H south end could go and also suggests why the KCS merger may not be very interesting to them.

http://www.cpr.ca/en/investors-site/Documents/investor-fact-book-2014.pdf
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Re: CP+CSX

Postby mtuandrew » Wed Oct 15, 2014 1:26 pm

JayBee wrote:
mtuandrew wrote:But CSX already owns BOCT. Isn't that a major conflict of interest to own two of the three Chicago belts? I'd look to NS grabbing a larger share of the Harbor if a merger goes through.

Also, I will be interested to see if CP actually sells the D&H (to the NS or to anyone else) now that CSX said "no."


B&OCT is not a full Belt Railroad, it has Trackage Rights over the Harbor to reach the UP at Proviso and the CP at Bensenville.

Remember that Conrail also said "No" to NS twice before the Railroad was split between NS and CSX.

Ah, I'd missed that CP didn't have a direct connection to BOCT. I thought they connected at Western Avenue, but that's a UP/NS line going south, not CSX coming north.
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Re: CP+CSX

Postby fatmatt129 » Thu Oct 16, 2014 7:20 am

If CSX was to merge with CP, whether by negotiating or by CP buying majority of CSX shares, how would that affect employees in both companies. For example, a new CSX carman as i am, or i have a good friend thats a CP track worker. Would this be a merger more on paper, and both continue to have separate operations, or would this be a full on CSX blue turning to CP red.
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Re: CP+CSX

Postby Gilbert B Norman » Thu Oct 16, 2014 7:50 am

No doubt Mr. Matt, the end goal is to completely integrate the operations of the two roads. However, owing to a treaty signed God knows when, Canadian roads operating in the US do so through a US subsidiary, AND vice versa. The existing US corporation for CP operations is the Soo Line Corporation comprised mainly of properties of the SOO D&H and those of the former MILW.

Now looking at your personal microcosm of your seniority as a CSX Carman, I would not expect any changes for a long, long time - maybe even for the duration of your career. However, from my railroad experience, if there is to be any change to your seniority district arising from a merger or otherwise, that is a matter to be negotiated between your Organization, the BRC/IAM, and the carrier. Railroads have traditionally used "top and bottom", i.e. employees go on the top of one district bottom of the other new hires on the bottom of the one that is to survive, when merging a seniority district, although a "dovetail", i.e. everybody gets placed on one new district in the order of their seniority, has been implemented infrequently. To me, "top and bottom" is fairest and minimizes employee disruption.

What you, and hopefully your Brotherhood, do NOT want is for the matter of seniority to go "off the property" to an arbitrator with final and binding authority. "Things can get weird" in that instance.
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Re: CP+CSX

Postby Engineer Spike » Thu Oct 16, 2014 10:05 am

Actually DME, SOO, and D&H are all separate companies. My W2 and BA6 both show that I am an employee of Delaware and Hudson Railway, Inc. SOO does most of the administrative functions for the US properties. When I started, D&H had more of its own administration in Clifton Park. Payroll was there, but moved to MN about the time the clerk retired.

There is no joint rosters now between SOO, DME, or D&H. I don't think that CSX has combined much of the Conrail, B&O, C&O, L&N, Seaboard..... On the other hand, BNSF has a combined roster for ATSF, Frisco, Q, and C&S. The NP, GN, and SP&S are separate from the first group.

It is sort of a moot point anyway. They could do something in Chicago, like eliminate either Barr, or Bensonville. The D&H could combine with Selkirk area. This would be about the extent, since they serve separate areas, and this would be end to end.
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Re: CP+CSX

Postby Gilbert B Norman » Thu Oct 16, 2014 11:18 am

Let's get this point clarified, Spike:

Straight from the Horse's Mouth - or the 2013 Soo Line Corporation Form R-1 as submitted to the Surf Board:


The consolidated financial statements and supporting schedules included in this annual report include Soo Line Corporation (SOO)
and the following subsidiaries:

Soo Line Railroad Company (SLRR)
Soo System Radio Communications Corporation
Dakota, Minnesota & Eastern Railroad Corporation (DME)
Wyoming Dakota Railroad Properties, Inc.
Soo Line Holding Company
Delaware and Hudson Railway Company, Inc. (DH)
Wilkes Barre Connecting Railroad Company
Northern Coal and Iron Company
Albany & Vermont Railroad Company
Saratoga & Schenectady Railroad Company
CPR Locomotive Equity Company
Soo Green Holding LLC
Canadian Pacific PTC LLC


I am completely mistaken if I lead anyone to believe that all CP/SOO properties had been merged into one, for clearly they have not. Those actually merged into the Soo Line Railroad include the Minneapolis, St Paul,& Sault Saint Marie, the Wisconsin Central (first incarnation), the Duluth, South Shore, & Atlantic (less of course, those lines that were acquired by the second incarnation of the Wisconsin Central), and of course "my" Chicago, Milwaukee, St. Paul, & Pacific.
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