The Next Round of Mergers

Fellow member CPF363 and I often discuss railroad mergers. Sometimes about proposed mergers which never happened. Now that Conrail and Southern Pacific have been fully digested into their respective mergers, what do you think will happen next? Everyone talks about the obvious, such as BN-NS, or UP-NS.

The big question is how the Canadian roads will fit in. They already have extensive US holdings. BNSF and CN already proposed a merger, but it was too soon after the upheaval of the two mergers, which I already mentioned. The STB didn't want another disaster so soon.

With the head of steam that Hunter Harrison has built up at CP, might he initiate something? Everyone says CP+KCS, but what about CSX? They have been an underdog financially, especially compered to NS. This would add a coast-to-coast road married to one with an extremely deep market penetration in the east.

We have to consider that it will happen. I pointed out to CPF363 that the merger game has gone on forever. One of my great - great - great grandmother's cousins was an attorney who helped organize the Connecticut Western. It became part of the Central New England, which became part of the New Haven, which became part of Penn Central, which became Conrail. It was then split between CSX and NS. It's like the Billy Joel song, "We Didn't Start the Fire."

Everytime hunter talks at a rail confrence, or we "CP" give our finacials to the community, he says within the next 3-5 years there will be major rail consolidation, due to capacity issues and the need to move frieght by rail doubling by 2025-2030. You goto CPR.CA and listen to some of the wedcasts. Creel has said in the may confrenece that CP is well positioned to merge with a east coast player and a west coast player, and a few short statements about us and the csx. CP never merged with the KCS because we never had the money to do so, now we do so maybe. Whats been the buzz around the yard office lately is that we are real close to hashing out the finals on buy the IHB, with chicago being a cluster duck, and us selling half of b-ville to ohare so he can pump that money into the operating ratio "2billion" or so and look like the self proclaimed savior of CP. CP gave up or gave the NS close to 100 miles of the DH, and working on a monatery deal with the csx. They have been after it twice already and I guess a 3rd times a charm, I know its not a major merger but its a start. I think EHH would love to be know in history as the guy who connected the east and west coast.

There's been the talk, but I was half using CP as an example. In spite of Hunter's efforts, it may or not happen. My question was based more on the industry in general. If Hunter is talking about it, the other CEOs must also be thinking about what parts of the big pie which they want.

My second thought was about where KCS, and the Canadian roads fit. Could a three way merger be accomplished? The most obvious are BNSF-NS, or BNSF-CSX, with UP getting the other eastern. It would be a real kicker if a US and Canadian road married. I say this because Canadian roads are bicoastal, and it would upset the 2 east, and 2 west US makeup.

I cannot see KCS being a merger partner unless the victim of an unfriendly takeover. I've never worked for KCS, but have worked for railroads with close relationships with KCS, rode with KCS crews, and have worked with several people who did work for KCS.

KCS has a corporate culture that places a high value on independence. There is a pride that permeates the organization from the very top right down to the road and maintenance crews. I cannot see giving that up to become folded into anyone else's railroad.

KCS is a strong operation and owns subsidiary railroads themselves. Unfriendly takeover victims tend to be weak sisters.

Les

In the last year, most class 1 stocks have climbed past the $100/ share mark. CSX seems to be lagging behind in that department. I have been buying shares in hopes that someone does go after it, and drive the prices up. Although Trains had the article a few years ago, by Fred F. about how they are improving, it might not be enough.They may still be behind in some areas. I certainly don't think I'll loose my gamble.

What do you think the timetable will be for the next round to start?

I don't think there will be another round of "mega-mergers"; the opportunities lie at the "other end of the marketplace" -- carload freight of an increasing number of basic commodities which are becoming better-suited to rail movement as the fuel and labor cost differentials inveigh further in the direction of rail carriage.

The problem here is how local entrepreneurs can work in partnership with the major carriers to develop an expanded network with greater capacity -- possibly dusting off a few more abandoned or downgraded lines -- the former Erie line between Binghamton and Chicago comes to mind as an immediate answer for "high and wide" shipments.

The anarcho-capitalist at the center of my psyche loathes it, but while the potential for regaining high-value and time sensitive traffic is enormous, I don't see how in can be attained without some sort of centrally-coordinated public-private partnership, and the "Big Seven" can deal with that just as they are.

I can't really see there being less than 4 major carriers in North America...The current 7 (UP, BNSF, NS, CSX, CP, CN, KCS) may shrink down. I can see CP going after CSX. But I feel like you can only build up so much before the public, and in response the government, cries foul. I'm not trying to say whether big mergers are good or bad, but I don't think it would go over very well with Uncle Sam and they can stop it in the long run.

The first mergers I can see having a remote chance of happening are BNSF-CSX, and UP-NS; or BNSF-NS and UP-CSX. Two coast-to-coast railroads would have a loss in competition though, but only slightly. The main loss of competition is for captive shippers, and I think that mandatory reciprocal switching would be a condition of this merger.

CN and CP could then potentially merge with the big two, but I don't see this as likely.

KCS I see maintaining its independence unless it loses its Mexican concession (when are they up for renegotiation?), and then the best "map fit" would be with CP, although currently CP is in no shape to purchase it.

Overall, I think the merger era is over. The STB made it clear in the CN-BNSF attempt that it would make conditions of a merger so unpalatable that I predict the current seven to survive indefinitely.

I think the CN-BNSF merger was nixed because of the recent (at the time) poorly executed UP-SP, and CR split. I am interested in the governmental views too when will enough be enough, and they get broken up like the Bell System.

It would be good to see some old routes resurrected, either as increased capacity of present carriers, or as was suggested, outside investment.