Friday, January 22, 2016

Rail Regulators May be Asked to Look Into North American Freight and Intermodal Market

Accusations That Potential Mergers Were Deliberately Blocked by Operators
Shipping News Feature
NORTH AMERICA – Canadian Pacific (CP) are still pushing for a major shake-up in the North American rail freight and intermodal market arguing that the industry as it currently stands needs a comprehensive upheaval in order to support continued growth in the region’s economy. According to CP, there have been ‘a number of major US railroads who have stated publicly that they are organising a collective campaign to block significant mergers’. Included of course is CP’s repeatedly rejected offer to buy competitor Norfolk Southern (NS). In response to these supposed actions, CP has submitted a letter to the US Department of Justice, asking it to review the recent behaviour from the other railroads.

CP argues that, according to statements reported in the press, a number of large (Class 1) US railroads are concerned about the damage that increased competition from a CP-NS combination would have on ‘shareholder value’ and on their own profitability. In its letter, CP says that it is ‘concerned that these actions are being taken for the primary purpose of restraining trade in violation of Section 1 of the Sherman Act, and not for any legitimate purpose that would benefit the public or enhance competition in the US railroad industry’.

This of course ignores the fact that the NS Board has rejected the previous proposals, as detailed in our coverage in several articles over the past few months, stating that the offer was inadequate and would create substantial regulatory risks and uncertainties that are highly unlikely to be overcome, adding that a deal would not be in the best interest of the company and its shareholders.

It is unlikely that this is the last we will hear of the potential merger given the persistence shown so far by CP, whose attempt to merge with CSX last year dribbled to an end in October, and it looks to be a long year ahead for the North American railroad industry with regulators ever keen to sniff out a scandal, even as each side considers their options, with the likely outcome of any enquiry meaning shareholders somewhere being unhappy, be it Norfolk Southern’s complaining of an undervaluation, Canadian Pacific’s claiming over-pricing, or other railroads which could most likely see their value depressed.

Once again outlining all the benefits it believes a merger between CP and NS could bring to the industry, CP has released two white papers in the past 10 days in an attempt to address some of the concerns NS and its shareholders show, following the recent third rejection just before Christmas, which saw NS turn down a proposal for $32.86 in cash, a fixed exchange ratio of 0.451 shares in a new company that would own Canadian Pacific and Norfolk Southern, and 0.451 of a Contingent Value Right.

CP’s first white paper of 2016, ‘A 21st Century Railroad for a 21st Century Economy’ focuses on the need to change the status quo in the railroad industry. It concludes that consolidation is the way to go in order to grow the industry and the economy, ending that ‘without industry consolidation, however, future service disruptions are a certainty’. One major service disruption the company hopes to alleviate is the focus of the second white paper. Currently, trains interchanged in Chicago are broken apart and rebuilt in yards within the city and then delivered to receiving carriers, a process involving multiple interchanges between multiple carriers in multiple yards. This causes significant delays and problems in the area.

This second white paper concludes with CP suggesting that a combined CP-NS network will reduce congestion in Chicago and free up capacity for other railways, by diverting hand-offs between railways to underutilised hubs outside the city and reducing processing in yards within the city. Canadian Pacific claims it sees a real opportunity to make a meaningful contribution to address the congestion in Chicago while significantly improving service for diverted traffic, resulting in a stronger and more resilient rail network, better able to avoid and recover from future service disruptions, a suggestion sniffed at by its intended partner.

Photo: CP’s plans for CSX and perhaps also NS have derailed.