If that were to happen, Canadian Pacific CEO Hunter Harrison says he’s confident he could work out a deal to buy NS that would win over shippers and regulators. Harrison made the comments about a proposed CP-NS combination earlier today at an investors’ conference.
Harrison sketched out how the combined company might work, who would run it, and how CP would wring operational efficiencies out of NS. But none of that matters, he told analysts at the UBS Industrials and Transportation Conference in Boca Raton, Fla., if NS won’t come to the table.
And if NS doesn’t talk or rejects CP’s offer, would CP attempt a hostile takeover? It depends on how you define “hostile,” Harrison says. CP will assertively make its case to shareholders, but he’d rather sit down with NS to reach a deal. “We would prefer not to be in a hostile position,” he said. “That’s not what we’re about.”
Although NS characterized CP’s offer as “low premium,” Harrison said the $28 billion offer was a starting point. “Is that our final offer, line in the sand? No. And I tried to indicate that to them,” he said.
Last week’s 2½-hour meeting between Harrison and his NS counterpart, James Squires, was the only contact the railroads have had. During that meeting, Harrison said he made his case for a merger of equals and offered Squires a CEO position. “We’re not going to push him out,” Harrison says of Squires, who has been chief executive since March.
Harrison said that under this scenario both railroads would maintain their separate identities – NS as the thoroughbred and CP as the tamer of the Canadian West – at least initially.
CP says the merger would create $1.8 billion in cost savings, with most of that coming from efficiency gains at NS. Harrison noted that his team brought CP’s operating ratio from around 80 down to around 60. There’s no reason NS’s operating ratio of about 70 can’t be pushed down to 60 or below, Harrison says. “That’s clearly the big bucks of the synergies,” he says. “The real opportunities are in the field, where the costs are. It’s basic, fundamental railroading.”
The size of the NS locomotive fleet would be reduced by 35 to 40 percent, Harrison says, with a similar reduction in rolling stock. But there are minimal opportunities for yard, line, and shop rationalization, he says. And the NS physical plant, with its long, well-placed passing sidings, is in better shape than CP’s, Harrison says.
Harrison stressed that he believes a CP-NS combination is pro-competitive and would win regulatory approval. He also said that because the merger is an end-to-end combination, the review process should be relatively straightforward despite the STB’s untested and more stringent review process. And he says that means it shouldn’t take until Dec. 31, 2017 to win approval, as CP has projected.
Shippers would gain significant protections, such as the opportunity for reciprocal switching and the freedom to select more efficient routes than railroads have traditionally allowed, Harrison says. That will enhance competition, he contends.
How would reciprocal switching work? “All they have to say is they’re not satisfied. If they don’t like our product, our service, and our price, then they can bring over Brand X for a very reasonable reciprocal rate,” Harrison says.
Shippers don’t currently have that option, he pointed out, and it’s unlikely regulators or legislation would mandate such open access. “I can’t imagine what a shipper could complain about there,” Harrison says.
CP has not reached out to shippers to lobby for their support. And shippers have not contacted CP to voice their opinions, either. “When I first got to CP, every customer wanted to talk to me,’” Harrison says. “Now nobody wants to talk to me because they don’t have service problems.”
Harrison dismissed the possibility that opposition from other Class Is would derail a CP-NS combination. If Warren Buffett were to go before the STB and complain that the merger would damage his BNSF Railway, Harrison says, “I don’t think he’s going to get a lot of sympathy.”
Just mind your own business hunter and leave ns alone. They said no no
The whole thing stinks to high heavens! As has been said, Hunter Harrison cares about no one but Hunter Harrison – plain and simple. It would be ashamed to see a great railroad like Norfolk Southern be dismantled under Harrison and his minions. Hopefully, NS will walk away from this whole thing.
O no i was not talking about you i was talking about Harrison.
NS is flipping over losing some of that major traditional income maker – coal. That's going to give them a long term stomach ache. So let's do something for the rest of the country and develop a real way to get trucks off of the interstate routes. The states should support and help develop that program to reduce the dollars that are required to keep highways up to a standard that will support the weight and pounding that all of those miles of pavement take. Reduce trucks on interstates by 10% to 20% will provide benefits where they could be hauled shorter distances by rail and save millions.
NS is in the perfect position to double and triple the amount of trains hauling trailers and containers with parallel lines to I-75, I-80, I-81, I-95, I-64, I-40 and many, many other miles of state and federal numbered high volume highways.
Let's get creative out there and really do something to reduce all of those trucks and improve our air.
None of that will come from Calgary. There are still enough of those innovative Southern Railway thinkers left in NS that they could come up with something to offset the reduced coal revenues in both the short term and long term. Also, I see new industries coming on line all over the south every day. All that is going to do is increase the need for freight hauling
Let's dig up Bill Brosnan – he will make Mrs. Harrison's baby boy bend over and grab his ankles.
Please Mr. Caramella, Hunter is an American, born in Tennessee. Please ot blame that on Canada
I know him well and it's Hunter's way or the highway. If the NS says no, it won't be over and it won't be pretty.
"And if NS doesn’t talk or rejects CP’s offer, would CP attempt a hostile takeover? It depends on how you define “hostile,” Harrison says. CP will assertively make its case to shareholders, but he’d rather sit down with NS to reach a deal. “We would prefer not to be in a hostile position,” he said. “That’s not what we’re about.”"
Am I the only one who caught this paragraph? I figured someone else would have commented on this by now. "CP will assertively make its case to shareholders, but he'd rather sit down with NS to reach a deal. "We would prefer not to be in a hostile position."" That means he wants NS to play nice, and if not, he and Ackman, the 21st Century Robber barons will go hostile. Remember what happened to the previous CP management…
Caveat??? E. Hunter Harrison has put everyone on notice that he wants NS on HIS Terms, or else! That was a veiled threat to NS that if they do not play ball with him, a hostile takeover would be the next step. Harrison is a corporate raider, who only has his own narrow interests at heart. Sure, getting an operating ration down 10 points, from 70 to 60 is a noble goal but to accomplish that Harrison would scrap much of NS, probably including their Steam and Heritage Programs.
Shareholders do indeed deserve a good return on their investment as they do risk their capital to make money. It is just unfortunate that a near sighted predator like EHH is the liar who who trying his best to upset U.S. Railroading. Oh, and his comment about Warren Buffet is childish. I would love to see Warren Buffet shove it right down Harrison's throat, if he gets involved in this issue.
Hunter Harrison needs to be permanently barred from entry into or any dealings in the US. The last thing we need is dismantling an almost functioning railroad to ensure next quarter's gains. By the time the short term $$ gains are done with, he'll be long gone to his next "project".
I also find it hard to see that a company board's fiduciary responsibility is solely focused on short term gain. In that case there are lots of corporations that should be broken up and the money divvied out to the shareholders, instead of us having to hold on to the stock and wait for the price to go up or dividends to accumulate. Let's bring back the 1980s. (Sarcasm)
So after the new railroad gets done cannibalizing itself and provides poor local service, Hunter will let a "competitor" (think scab outsourced contractor) come in and provide the labor and cost intensive service that he doesn't want to. Pay attention shippers! He gets to keep the money making trains and dumps the others.
All he talks about is dismantling NS, nothing of CP. I can't believe how pissed off I am about this! Hopefully someone has the guts to kick his ass back north of the border!
@Jack Fuller
Well, its all a matter of differing business philosophies, I guess. We find such an one-sided approach to cost reduction and shareholder returns an Anathema and a shock just like how you people would find our expectation and approach to capitalism an Anathema.
What I meant was not the fact that all the things mentioned in my earlier post is merely "nice" but the fact that the approach to delivering shareholder returns by dogmatically focusing on operating ratio is too narrow and parochial. I feel that delivering returns by cutting cost, an extremely short term solution, akin to how a company wastes its value by utilizing its cash reserves for a buyback rather than fresh investments. As an extension, I will be frank, to deliver shareholder returns, the corporations off shored service to my country and manufacturing to China, it reduced the costs, but didn't it have a deleterious effect on your country? wasn't entire supply chains and clusters lost?
Say you shut down Yards, sidings and you single track, what are the long run implications of that to expansion and the opportunity costs of the same? You run one man crews, what are the safety implications of that? you cut customer programs other things you do to the community where you operate, what is its impact on goodwill and public perception? Don't these things matter as well?
Again its my belief that value should be maximized not just cash.
But then again, these are just my opinions, sorry for my long post
It will be all about what shareholders – mainly institutions, I'd guess – can get from the transaction. It's a business, and as such, it's all about financial returns. If CP's offer is "good enough", the NS board has to accept it, or run the risk of lawsuits over fiduciary responsibility. The board doesn't have to consider anything else – not the steam program, or NS yards, or the number of employees on a train.
@Luke Solberg
Who me? I am sorry for that vociferous post, I couldn't stop myself from posting on this issue, I don't claim that I know everything, I have but a very small knowledge of North American railroading given to me by my books and 'Trains'
Gary Caramella, for the record, Hunter Harrison isn't Canadian, he's a Tennessee native who started his career on the Frisco, ending up as CEO at IC before it was bought by CN. He was CEO at CN until retiring, then came back under Bill Ackman to be CEO of CP.
He's not very popular with railroaders north of border either. He's strictly a shareholder's man and doesn't appear to care much about the railroad(s) he's led over his career.
Hunter's glib talk to appease aside, here is a snapshot of what might happen once this merger is consummated:
1. Shut down of NS yards and loss of jobs to Yard employees
2. Removal of the second crew member from the NS locos
3. Shut down of workshops, "Oh, Juniata!"
4. Axing of several employees
5. No Class J 611 and other steam programs
6. Not to mention increased power concentration in one company (holding company as it may be, this talk of separate legal entities is to please the regulator and combine later)
7. Others will merge with each other as well (CN+BNSF+KCS, CSX+UP)
I see that NS is the bigger company with more route miles, revenues and profits as well as vision, at least so far; to see this decline in coal traffic as a pretext for a merger is just pure overdrive. Much of Hunter's work on CP has been through cost control, reducing employee count, downsizing assets et al. in the typically parochial Wall Street short termy way. There won't be any long term investments, expansion or even investment in new technology.
If the NS employee, public and shippers opinion is against this merger, why can't they form a FB or What's App group say "Friends of the NS" to protect their interests and make their case to the STB? It would serve as a good counterpoint to corporate lobbying.
I sincerely hope this doesn't spell an ignominious end to a railroad that I admired from far away ever since I was introduced to N & W by Trains.
If whomsoever from NS is reading this, I wish you Good Luck, my support, worthless as it might be, is with you.
I hope by some miracle NS might escape from the clutches of the hunter, "Vulture", Harrison.
I am going to say what everyone is thinking. This guy thinks he knows everything…..
Brenden Perkins are you ever right!! This magazine, and one contributor in particular, think Harrison is the man. Of course, if you read said contributor's by-line he was from management and very anti-union, as is this publication. Harrison needs to stay on his side of the border and why should America let some damned foreigners buy yet another piece of this country? I had the good fortune to ride behind 611 this past June and the pride of the NS employees I talked to was terrific; they are proud of their railroad and of that beautiful locomotive as well. Harrison will see that comes to and end as well as the steam program and anything else NS does to promote good will not just for NS but for the entire rr industry. Yes, Mr. Perkins I am as sick and tired as you are to keep reading this publication's butt-kissing of that damned Canadian. Hey, Fredso and Trains, if "your boy" tells you to jump off of the Hellgate Bridge, how long will it take you to get there?
This guy has a history of ruination – BNSF and CN. He doesn't care about the employees or the condition of the railroad, just making himself look good to the shareholders. Short term gain, long term pain.
I don't like it. NS has a lot more going for it than CP and I don't think it would make it passed the STB like the CP CSX one did.
Next article title: Hunter Has a Bowel Movement!