The $700 million mystery: Why is CSX interested in regional Pan Am Railways?

Posted by Bill Stephens
on Friday, November 13, 2020

Pan Am Railway East Deerfield, Mass.-South Portland, Maine train EDPO passes Orange, Mass., on the company’s Freight Main last month. Leading the train are four former CSX GE C40-8s, now standard road power on PAR. Scott A. Hartley
I have been scratching my head all week trying to figure out why CSX Transportation wants to acquire New England regional Pan Am Railways. At least I am in good company. Everyone I have talked to – more than a dozen industry analysts, consultants, short line and regional railroad officials, and current and former Class I railroad executives – is puzzled, too.

Norfolk Southern disclosed CSX’s interest in Pan Am in a regulatory filing this week. Pan Am is NS’s route into New England, via their joint venture called the Pan Am Southern. NS does not want its Class I rival stepping into Pan Am’s shoes in the Pan Am Southern, so the NS filing with the Surface Transportation Board was a shot across CSX’s bow.

We can understand why NS would be opposed to a CSX deal with Pan Am. What everyone seems to be looking for is why CSX would want Pan Am.

CSX has confirmed it is talking with Pan Am, as well as NS. On an investor webcast on Thursday, Mark Wallace, CSX’s executive vice president for sales and marketing, declined to comment beyond the railroad’s statement. 

But Wallace did outline CSX’s general view of acquisitions. Any deal to extend the railroad’s reach would have to be good for customers while providing an attractive return for shareholders, he says.

“We think we do a pretty good job running railroads. And we’re pretty good operators,” Wallace says. “And if we can take our model and overlay that model onto another property and produce the types of returns and results that we have at CSX, then I think that those are the things that we would consider doing. So we’re always on the lookout for interesting projects.” 

CSX is sitting on a huge pile of cash and CEO Jim Foote may want to make a splash with an acquisition. 

Clearly CSX sees potential in Pan Am, perhaps as a way to build on its dominant presence in New England. If so, it’s a turnabout for CSX, which has been retreating from New England since the 1999 acquisition of Conrail. It sold the former Boston & Albany main line east of Worcester to the state a decade ago for increased MBTA commuter train use, and its Beacon Park yard in Boston was ripped up for redevelopment. CSX has disposed of some Boston-area branches and just last month leased a branch to short line Grafton & Upton.

Yet CSX’s former Boston & Albany main line remains the primary freight artery serving the region from the west and handles more than a dozen trains per day. Among them: A daily merchandise train in each direction that link CSX’s hump yard at Selkirk, N.Y., with Portland, Maine, via Pan Am interchange outside of Worcester, Mass. CSX and Pan Am also interchange some merchandise traffic and unit grain trains at Rotterdam Junction, N.Y., the west end of the former Boston & Maine.

NS, in contrast, runs just two pairs of trains over Pan Am daily, a merchandise train to and from the former B&M hump yard at East Deerfield, Mass., and an intermodal/auto train to Ayer, Mass., the eastern extent of the Pan Am Southern. 

It is unclear what CSX would gain from acquiring Pan Am, aside from a longer haul on traffic it already enjoys, including paper and forest products produced in the Pine Tree State and neighboring New Brunswick. 

Pan Am does have an impressive growth pipeline, which railroad President David Fink outlined in a presentation at the North East Association of Rail Shippers conference in September. Maine paper mills have come back from the dead after shifting production from paper used in printing to high-demand paper used in packaging. Pan Am has other traffic on the rise, too, including propane, biodiesel, municipal solid waste, aggregates, and Poland Spring water.

“Railroads in New England have to be hardscrabble,” Fink says. “So if one thing doesn’t work we pivot to something else. And that’s what we’ve always done. And everyone else that connects with us has done the same thing.”

The problem is that much of Pan Am’s growth depends entirely on having a local commercial team that can connect the dots and meet with customers regularly to see projects come to fruition. And some of Pan Am’s traffic moves in relatively short hauls, either entirely on its own rails or in conjunction with connecting short lines.

All this is the bread and butter of regional railroads. It is not what Class I railroads do, and if CSX were to acquire Pan Am it is likely that virtually everyone at Pan Am headquarters in Billerica, Mass., would be sent packing. 

Pan Am also is not your typical regional because it operates on routes with considerable passenger and commuter train traffic in the Boston area, as well on its Boston-Portland line and its route from East Deerfield to its isolated branches in Connecticut. Class I systems tend to try to avoid passenger interference when they can.

Could there be a defensive reason CSX is looking at Pan Am? Perhaps, but that raises another question: Defense against what? Overall rail traffic in New England has been declining for years and no other Class I seems interested in Pan Am, including NS.

Massachusetts is promoting an east-west passenger corridor that would extend commuter service beyond Worcester all the way across the state to Springfield and Pittsfield, potentially using the B&A. CSX could be looking ahead and viewing Pan Am as an insurance policy that would protect its access to New England if the B&A were to become primarily a passenger railroad. 

I don’t buy that argument. Massachusetts is broke due to the pandemic-related decline in tax revenue, which puts rail investments in jeopardy. The B&A efficiently serves the biggest freight markets outside of Boston, mostly at night when passenger traffic wouldn’t run. And unlike the B&A, Pan Am’s line is not cleared for domestic double-stacks due to an obstacle called Hoosac Tunnel, which at 4.75 miles is the longest bore in the east and would be prohibitively expensive to clear.

CSX may not emerge as the winner in the Pan Am sweepstakes. Pan Am is talking with other suitors, which presumably include short line holding companies such as Genesee & Wyoming and perhaps an infrastructure fund. The asking price may be around $700 million, according to multiple people familiar with the matter.

NS has raised regulatory concerns over a potential CSX acquisition of Pan Am, saying it would undermine competition and hurt shippers and other railroads. A deal would put CSX in the awkward position of owning and operating New England’s dominant freight line and holding a 50% interest in its rival’s route to the region. But there are only a couple of 2:1 shippers, who would go from two-railroad access to one, and no short lines that would go from two Class I connections to one.

We don’t know the details of the Pan Am Southern joint venture and precisely what protections it gives NS in the event Pan Am Railways is sold. But NS would not have sent the letter to the STB if it could veto a sale.

One thing’s for sure: The potential sale of Pan Am should be interesting to watch.

You can reach Bill Stephens at bybillstephens@gmail.com and follow him on twitter @bybillstephens

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