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Canadian Pacific Norfolk Southern Merger

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Posted by Murphy Siding on Friday, December 11, 2015 10:55 AM

Victrola1

Matt Rose at BNSF has spoken on the proposed CP - NS merger. 

What will the Union Pacific say? 

 

  What did Matt Rose have to say?

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Posted by Victrola1 on Friday, December 11, 2015 10:34 AM

Matt Rose at BNSF has spoken on the proposed CP - NS merger. 

What will the Union Pacific say? 

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Posted by schlimm on Thursday, December 10, 2015 10:28 PM

Paul_D_North_Jr

I agree that approval of mergers is strictly an STB decision.  However, I believe the Justice Dept. can intervene in a merger applicaton, and present its arguments why the merger shouldn't be approved, mainly such as the anti-competitive efffects.  And even if the Justice Dept. can't or won't intervene, the states and shipper groups can - and often do - present that same objection

- Paul North.   

 

Try reading some of Fred Frailey's blog posts.

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Posted by kgbw49 on Tuesday, December 8, 2015 9:43 PM

Yup. Understand the intervenors. Spent some time in the electric industry.

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Posted by Paul_D_North_Jr on Tuesday, December 8, 2015 8:28 PM

I agree that approval of mergers is strictly an STB decision.  However, I believe the Justice Dept. can intervene in a merger applicaton, and present its arguments why the merger shouldn't be approved, mainly such as the anti-competitive efffects.  And even if the Justice Dept. can't or won't intervene, the states and shipper groups can - and often do - present that same objection

- Paul North.   

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Posted by Dakguy201 on Tuesday, December 8, 2015 6:08 PM

i agree the Justice Dept. directly does not have jurisdiction over rail mergers.  However, consider the Board of the STB.  One is a labor lawyer who represented those interests in transportation matters.  The second is a longtime Republican staffer in Congress with experience in transportation matters, in particular the mechanics of deregulation.  The third is a Democrat from Kansas, where she served in several governmental positions related to transportation.

Given how Washington works, that is probably more expertise in the area being regulated than exists in other administrative bodies.  However, if you believe those folks don't have their fingers in the air regarding the direction of the political winds, you are far more trusting of the regulatory state than I.   

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Posted by BaltACD on Tuesday, December 8, 2015 4:18 PM

Never too old to have a happy childhood!

              

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Posted by kgbw49 on Tuesday, December 8, 2015 11:24 AM

The Justice Department currently does not have any jurisdiction over railroad mergers. That doesn't mean the law could't be changes, but right now railroad mergers are 100% an STB decision.

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Posted by SteamRoller88 on Tuesday, December 8, 2015 11:18 AM

Can someone who has more insight on the market and financials briefly explain what would happen to the stocks of each company if this goes through? I read that NS stock could get to high as $140-$160 a share. What is going on with CP stock during this time and at what point do both stocks become one? I read that after the merger is complete the new company would have a value of $240 a share. How is this number decided? Add both stocks together?  Thanks!

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Posted by Dakguy201 on Tuesday, December 8, 2015 9:19 AM

Perhaps the bloom is off the rose in Washington regarding the merger of large components of an industry.  This is a portion of Fortune Magazine's daily briefing:

 

"U.S. antitrust enforcers are ending the year with a bang. The FTC yesterday filed a lawsuit to block the Staples and Office Depot merger, while General Electric threw in the towel on its fight with the Justice Department over a $3.3 billion deal to sell its appliance business to Electrolux. Last week, two big Tuna producers - Bumble Bee and Chicken of the Sea - called off their $1.5 billion merger in light of U.S. concerns. And all this in a year when Justice blocked Comcast's $45 billion bid for Time Warner Cable and the FTC blocked a $3.5 billion combination of Sysco and U.S. Foods."

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Posted by Ulrich on Tuesday, December 8, 2015 9:06 AM

The shine is really off the merger this morning... stocks of both CP and NS are down 4% and 6% respectively. With such a drop in  price NS shareholders may be more open to working with CP directly. Maybe that was the plan all along... give NS an offer or two  they can easily refuse and then go directly to the shareholders.

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Posted by Victrola1 on Tuesday, December 8, 2015 8:49 AM

Canadian Pacific said on Tuesday that it had revised an offer for its rivalNorfolk Southern in hopes of allaying investor fears about a lengthy regulatory review of the proposed merger.

The revised offer contained a smaller cash component than the previous proposal, which Norfolk Southern rejected last week, and shares in a new holding company that would own both rail carriers. Norfolk Southern shareholders also would own more of the combined company, Canadian Pacific said....

http://www.nytimes.com/2015/12/09/business/dealbook/canadian-pacific-revises-offer-for-norfolk-southern.html

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Posted by Paul_D_North_Jr on Monday, December 7, 2015 8:57 PM

kgbw49
Mr. North, just for the sake of the exercise and discussion, since NS is looking to boost its intermodal franchise, is there a chance that NS might make a move to acquire KCS to bring single line service from the growth in near-sourcing in Mexico to the approximately 80% of the US population that the combined service territory would cover? I seem to recall that the new STB merger rules had an exemption to the new rules for a KCS merger. Thanks for any insight!

I'm honored by your asking me, but unfortunately, I have no insights on that.

Instead, there's more than enough opportunity in NS's present service territory.  That's based on the number of trucks I see on the road in this area (eastern PA, Lehigh Valley to Harrisburg areas).  Plus, the "Crescent Corridor" route parallel to I-81.

- Paul North.   

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Posted by dakotafred on Monday, December 7, 2015 5:19 PM

Thank you for the correction, Jeff, on ex-Milw rather than RI. Memory lapse on my part.

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Posted by Los Angeles Rams Guy on Monday, December 7, 2015 3:52 PM

dakotafred

Given the "and that goes for your horse, too" tone of Squires' rejection, I'd be surprised if further overtures from CP were forthcoming.

Maybe now EHH can get after what should have been his objective all along: KCS. He was interested in it once, in his days at the IC. It makes even greater sense for CP, balancing CP with CN down South and putting it into Mexico besides.

 

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Posted by jeffhergert on Monday, December 7, 2015 3:08 PM

dakotafred

I agree about the "strategic importance" seen by Linda Morgan and continue to wonder why nobody has made a move on KCS. CP thought it was so important to get into Kansas City -- via ex-Rock Island ICE -- but stopped there. (Why not KCS to chemical Texas and Mexico?)

UP's already in Mexico, but what would be wrong with a little consolidation and rationalization? ('Enhancement of competition' -- as if there weren't already all those trucks -- is a U.S., not Mexican, preoccupation.)

And Warren Buffet is a big free trader -- why shouldn't he like a Mexican connection for BNSF?

As a modest KCS stockholder whose shares have tripled in value in a few short years, I'm still confident of that BIG payday.

 

They got back into KC via the exMILW lines, IC&E/DM&E, which CP sold that first became IMRL.  In reality, they bought back the railroad they sold.  Like IC did with the CC&P.  There is some exRI trackage. Nahant(Davenport) to Washington IA that MILW bought.  Plus the what was joint RI/MILW south of Polo MO.

I wonder if the reason EHH isn't interested in the KCS is because there isn't some easy assets that could be liquidated for cash fairly fast.  To make a CP-KCS merger work might mean to look long term and actually serve customers and move freight.  Money can be made, but it might not be fast enough to satisfy some on CP's board.

Jeff    

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Posted by Victrola1 on Monday, December 7, 2015 12:00 PM
"I'd like you to lend me some money" 
Tommorrow is Tuesday. What do you think the president of CP will say in response to the president of NS saying no way? 
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Posted by dakotafred on Sunday, December 6, 2015 8:22 PM

I agree about the "strategic importance" seen by Linda Morgan and continue to wonder why nobody has made a move on KCS. CP thought it was so important to get into Kansas City -- via ex-Rock Island ICE -- but stopped there. (Why not KCS to chemical Texas and Mexico?)

UP's already in Mexico, but what would be wrong with a little consolidation and rationalization? ('Enhancement of competition' -- as if there weren't already all those trucks -- is a U.S., not Mexican, preoccupation.)

And Warren Buffet is a big free trader -- why shouldn't he like a Mexican connection for BNSF?

As a modest KCS stockholder whose shares have tripled in value in a few short years, I'm still confident of that BIG payday.

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Posted by kgbw49 on Sunday, December 6, 2015 6:07 PM

Found this from a 2005 article in Trains regarding the KCS exemption from the new merger rules:

Kansas City Southern: not like the others
The first flag to fall, if railroad mergers resume, might be Kansas City 
Southern. Why? When the Surface Transportation Board revised the rules that govern railroad mergers (see page 32), it decided by a 2-1 vote to exempt KCS from those rules. The board concluded that a merger between Kansas City Southern and one of the larger North American railroads “would not necessarily raise the same concerns and risks” as a combination involving the other six Class Is. However, then-Chairwoman Linda Morgan disagreed with her board colleagues. Casting the dissenting vote, she commented, “KCS is of such strategic importance that any merger between it and another Class I railroad could well trigger the next round of major rail mergers resulting in two transcontinental railroad systems.”

Will events bear out her prediction?

 The smallest of the Class Is, Kansas City Southern sits strategically between other major railroads and controls the key bridge across the Rio Grande at La­redo, Texas. With Mexican affiliate TFM, Kansas City Southern operates a 6,000-mile system stretching from Springfield, Ill., to Lazaro Cardenas on Mex­ico’s Pacific coast. (KCS also has a 42% stake in the Panama Canal Railway.) Potential buyers might have been deterred by the messy dispute over control of TFM and the substantial debt KCS incurred in order to secure the TFM concession in 1996. Now the dispute appears resolved and TFM’s carloadings are growing at a 14% annual pace, which could catch the eye of other railroads looking for a profitable addition to their franchises. The KCS-TFM system would complement any major carrier except Canadian Pa­cific, with which it has no direct connection. And KCS remains small enough to be easily affordable.
However, Kansas City Southern would function quite differently depending on which larger system swallowed it.

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Posted by kgbw49 on Sunday, December 6, 2015 5:58 PM

Mr. North, just for the sake of the exercise and discussion, since NS is looking to boost its intermodal franchise, is there a chance that NS might make a move to acquire KCS to bring single line service from the growth in near-sourcing in Mexico to the approximately 80% of the US population that the combined service territory would cover? I seem to recall that the new STB merger rules had an exemption to the new rules for a KCS merger. Thanks for any insight!

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Posted by schlimm on Sunday, December 6, 2015 5:50 PM

Paul_D_North_Jr
a feeble-minded knee-jerk attempt to acquire NS

Citation?   A petty inaccurate and insulting comment about EHH.  His record of success speaks for itself. Sounds like someone is having another meltdown.

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Posted by Paul_D_North_Jr on Sunday, December 6, 2015 12:09 PM

schlimm
 In the Bloomberg interview, Harrison seemed prepared to go to NSC shareholders directly.  Given their dissatisaction with NSC management, it is quite possible he would succeed.

Your source for the statement of "[shareholders] dissatisfaction with NSC management" is exactly what ? 

I'm only one, but I'm not.  In an article in the Saturday/ Sunday edition of the Wall Street Journal, NS says that its strategy to offset the declining coal business is to go after intermodal instead.  I totally support that - a quote from the article: "Norfolk Southern's commitment to long-term value creation stands in stark contrast to Canadian Pacific's single-minded focus on operating ratio." 

Another source in the article said that CP needs NS because CP has few options left to fuel growth other than acquiring another railroad.     

And Squires had this to say about EHH's promoting the merger in view of the regulatory issues: "We can't help that [CP CEO] Hunter Harrison seems to have led shareholders down the garden path in terms of regulatory risk here. . . . We view, based on that advice [a number of regulatory experts and lawyers], the hurdles as very substantial."

The article has a lot more on the nerger, but I'm not going to repeat any more here.

Finally, an article elsewhere (Motley Fool, Oct. 8, 2015 - http://www.fool.ca/2015/10/08/why-canadian-national-railway-company-is-a-safer-bet-than-canadian-pacific-railway-limited/# ) points out that:

  • CP's share price is down 11% this year (as of that date). 
  • "CP is a heavily grain- and coal-focused business, and this presents a large degree of risk."
  • "About 90% of CP’s coal business comes from serving one customer—Teck Resources"
  • "The problem is that Teck’s largest customer is China."
  • "Teck began implementing rotating shutdowns of its six Canadian mines in Q3 2015. Teck’s CEO has indicated a production cut may be in the cards in the fourth quarter if production does not improve."

Seems to me that CP is pretty vulnerable, and may be trying to dodge a bullet with a feeble-minded knee-jerk attempt to acquire NS.  Meanwhile, NS has acknowledged its single-commodity market weakness, and has a plan to do the hard work necessary to diversify away from coal. 

- Paul North.   

"This Fascinating Railroad Business" (title of 1943 book by Robert Selph Henry of the AAR)
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Posted by Paul_D_North_Jr on Sunday, December 6, 2015 11:35 AM

schlimm
[snipped - PDN] . . . Based on EHH's 3 1/2 year record of success at CP (and CN and IC before that), that seems unlikely.  Many folks may hate his methods, but it is important to get the facts straight.

Yeah, it is.  CN's operating ratio - the metric that you cite above - was improved greatly in the mid-1990's when Paul Tellier was the CEO, so that CN could privatized via the IPO.  EHH had nothing to do with that - it took place several years before EHH came aboard through the ICG acqusition/ merger.  EHH inherited, maintained, and maybe even improved the OR a little bit - but he didn't have anything to do with the transformation of that organization to that kind of efficiency. 

- Paul North. 

 

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Posted by Paul_D_North_Jr on Sunday, December 6, 2015 11:29 AM

schlimm
[snipped - PDN] . . . shareholder lack of confidence in Squires' probability of cost-cutting in 2016. 

How do you know what the shareholders are thinking ?  No one asked me . . .

- Paul North. 

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Posted by Murphy Siding on Saturday, December 5, 2015 11:34 PM

schlimm

 

 
Murphy Siding

 

 
schlimm
 
Norm48327

 

 
schlimm

 

 
Andrew Falconer

Canadian Pacific is so weak that all they would do is run the Norfolk Southern to a bone bare money losing operation.

 

 

 

Hardly.

NSC operating ratio for 3rd quarter 2015 (Oct. 28) = 69.7 percent.

CP operating ratio for 3rd quarter 2015 = 59.9 percent.,

 

 

 

I don't believe it is as simplistic as that. There are many more factors to consider.

 

 

 

Norm:  When Mr. Falconer makes such a foolish statement as he did, it is simple to demonstrate the falsehood.

 

 

 

  I dunno...CP may have a better operating ratio, but could that be more an indication of short term policies of cutting and delaying things in order to make the stock prices look good  for short term goals of some stockholders, and less of an indication of longterm strength of a company? 

 

 

 

 

That is a different question.  The poster said CP is so weak they would turn NS into a money-losing operation.   Based on EHH's 3 1/2 year record of success at CP (and CN and IC before that), that seems unlikely.  Many folks may hate his methods, but it is important to get the facts straight.

 

 I see what you're saying.  You're right.  That is a different- yet related, I think- question.  However, I don't feel comfortable debating what Andrew Facloner's post really meant.  That would be too euclidian.

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Posted by Electroliner 1935 on Saturday, December 5, 2015 10:59 PM

The is one thing CP Rail does right. 

https://www.youtube.com/watch?v=a_jWaScptQ4

Beautiful Christmas train.

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Posted by kgbw49 on Saturday, December 5, 2015 6:18 PM

Mega-dittos, Mr. Firelock76! Pun intended, but mega-dittos!

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Posted by Firelock76 on Saturday, December 5, 2015 1:30 PM

Mega-mergers make me nervous, whatever they are or who they involve.  They seem to lead eventually to "We're too big to fail!" scenarios.

THEN those involved go running to Uncle Sam begging him to open his wallet and save their sorry butts.  It's happened before, it'll happen again.

Well, if you're too big to fail, you're too damn big!

Just my opinion.

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Posted by schlimm on Saturday, December 5, 2015 12:28 PM

Murphy Siding

 

 
schlimm
 
Norm48327

 

 
schlimm

 

 
Andrew Falconer

Canadian Pacific is so weak that all they would do is run the Norfolk Southern to a bone bare money losing operation.

 

 

 

Hardly.

NSC operating ratio for 3rd quarter 2015 (Oct. 28) = 69.7 percent.

CP operating ratio for 3rd quarter 2015 = 59.9 percent.,

 

 

 

I don't believe it is as simplistic as that. There are many more factors to consider.

 

 

 

Norm:  When Mr. Falconer makes such a foolish statement as he did, it is simple to demonstrate the falsehood.

 

 

 

  I dunno...CP may have a better operating ratio, but could that be more an indication of short term policies of cutting and delaying things in order to make the stock prices look good  for short term goals of some stockholders, and less of an indication of longterm strength of a company? 

 

 

That is a different question.  The poster said CP is so weak they would turn NS into a money-losing operation.   Based on EHH's 3 1/2 year record of success at CP (and CN and IC before that), that seems unlikely.  Many folks may hate his methods, but it is important to get the facts straight.

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Posted by Murphy Siding on Saturday, December 5, 2015 9:03 AM

schlimm
 
Norm48327

 

 
schlimm

 

 
Andrew Falconer

Canadian Pacific is so weak that all they would do is run the Norfolk Southern to a bone bare money losing operation.

 

 

 

Hardly.

NSC operating ratio for 3rd quarter 2015 (Oct. 28) = 69.7 percent.

CP operating ratio for 3rd quarter 2015 = 59.9 percent.,

 

 

 

I don't believe it is as simplistic as that. There are many more factors to consider.

 

 

 

Norm:  When Mr. Falconer makes such a foolish statement as he did, it is simple to demonstrate the falsehood.

 

  I dunno...CP may have a better operating ratio, but could that be more an indication of short term policies of cutting and delaying things in order to make the stock prices look good  for short term goals of some stockholders, and less of an indication of longterm strength of a company? 

Thanks to Chris / CopCarSS for my avatar.

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