BNSF Railway is flirting with the idea of a potential CSX Transportation or Norfolk Southern Railway acquisition as Canadian Pacific aims to acquire the latter railroad, potentially setting off a wave of consolidation in the Class I industry.
“We’ve never in this industry just done one merger,” Matt Rose, BNSF executive chairman, said according to a Bloomberg report. “You do a merger and then somebody else announces it because of this issue of stabilization of the industry and parity in various markets.”
Rose said his company, itself a product of the merger of Burlington Northern and Santa Fe 22 years ago, could be game to make a competing offer for NS. Alternatively, he said, BNSF could make a separate bid for the Jacksonville, Florida-based CSX, NS’s archrival and the target of a CP merger itself roughly a year ago.
But any move on BNSF’s part would face the same shareholder scrutiny and regulatory hurdles now besetting CP.
The ongoing back and forth between CP and NS has not been going as smoothly as CP CEO E. Hunter Harrison has said he’d like.
The Calgary-based railroad has been pitching a merger to NS for the past month to no avail. After NS snubbed a second offer Tuesday there has been talk of a potential hostile takeover — though it’s something the Class I railroad industry has never seen and is unlikely to occur, according to intermodal analysts.
Even if Harrison and his team manage to sway NS and resolve its board’s concerns that a takeover would roil service, operations and stock value, he will still have to sway rail regulators in both Washington and Ottawa.
BNSF’s conversation with Bloomberg plays into regulators’ fears on both sides of the border that a 21st century merger could open a Pandora’s Box, analysts told JOC.com.
“Part of the fear on the part of stakeholders is that one deal would touch off another complete round of mergers,” said Stifel transportation analyst John Larkin.
“The regulators are going to ask, ‘Are we setting off down a road here where there’s no return?’” said Larry Gross, senior consultant at transportation research firm FTR.
Rather than set off a new era of consolidation in the industry, there is a chance BNSF’s remarks will only strengthen the resolve of U.S. regulators on the Surface Transportation Board, which has the ultimate authority to nix any potential rail mergers, already largely opposed to the creation of a new transcontinental railway.
The last merger between Class I railroads was completed in 1999, when NS and CSX Transportation acquired Conrail and split its assets between themselves. As recently as this past June, members on the STB said they had “no appetite” for rail consolidations.
CP upped its offer Tuesday to $42 billion, $32.86 in cash per share and 0.451 of a share in a new holding company. The revised bid cut the cash component, but increased the stock that NS shareholders would have from 41 percent to 47 percent.
NS, however, called the latest offer worse than the first and “grossly inadequate” just 40 minutes after CP made the pitch on a conference call with investors and the media.