“We believe investor interest in [mergers and acquisitions] has resurfaced after reports that CSX’s corporate jet was recently flown to Calgary (where CP is headquartered) for the first time in several years,” Wolfe Research analyst Scott Group wrote. “In addition, activist hedge fund TCI is now the second largest shareholder of CP and a major holder of three other rails. Lastly, CP’s CEO Keith Creel spoke quite openly about his support for [mergers and acquisitions] at CP’s analyst day last month.”
Neither railroad would comment on the report.
But a railroad official pointed out that the CSX jet was in Calgary, Alberta, because CSX Executive Vice President Mark Wallace still has family in the area. Wallace was former CEO E. Hunter Harrison’s chief of staff at CN, CP, and CSX.
The Wolfe report cited factors that make mergers more likely, including having a Republican administration in the White House.
Independent analyst Anthony B. Hatch of ABH Consulting disagreed with the conclusions of the Wolfe report.
First, he says London-based TCI — or The Children’s Investment Fund — agitated for operational and financial improvement when it waged a proxy battle at CSX a decade ago. It did not urge CSX to seek a merger partner.
Second, while the Trump administration takes a more hands-off approach to regulation, Republicans are loathe to pick winners and losers in battles between corporate interests. Shippers, such as large chemical companies, would line up against any Class I railroad merger, Hatch says.
Third, Hatch says CP saw limited synergies from potential combinations with either CSX or Norfolk Southern, two railroads it approached from 2014 to 2016 when Harrison was at the helm in Calgary.
“The idea of CP starting this is far-fetched,” Hatch says, noting that CP’s previous efforts were all about bringing Harrison to a big U.S. railroad.
The Wolfe note did say that mergers would be unlikely to gain regulatory approval from the U.S. Surface Transportation Board and that tensions between the U.S. and Canada would make it difficult to win Canadian government approval for an American railroad to acquire CP.
Keith Creel sees himself as Hunter Harrison 2.0. However, the regulatory requirements are stacked against CP or CN taking over any US Class 1. In fact the assimilation of US holdings of the two Canadian Class I’s by US Class 1’s is more a possibility that vice versa. Former Illinois Central-Gulf Mobile & Alton and Wisconsin Central properties of CN and Soo Properties belonging to CP could easily be absorbed by UP, BNSF or CSX with little change in operations or traffic fluidity. Most of these routes are parallel to the others in any event. Alliances could take place but outright mergers? Two chances…Slim to none and slim has already left the building!
As a Canadian, I do not believe that either CP or CN should be allowed to merge with, take over, or be taken over by, any of the four big US railroads. The Parliament of Canada should adopt legislation to prevent any of these things from happening, which would be entirely within its powers. These railroads were built to unite Canada from coast to coast and to prevent it from being absorbed into the United States. Unfortunately Canada has a government now which regards legalizing marijuana as a higher priority than preserving the essential infrastructure of the country from foreign control.
Charles is correct. CP missed its chance with KCS by wasting time on the ill fated D&H purchase. As a CSX shareholder, I want an explanation as to why the corporate jet is in Calgary for no other reason than “Mark Wallace has family in the area”. He should be required to reimburse the company for personal use of the company plane.
ALEX- The time for CPRS to have picked up KCS was back when it was a small regional carrier (as when CNR picked up ICRR).
I have some thoughts about this as well:
1. First, it’s HIGHLY, highly unlikely that either BNSF or UP would EVER let CPRS (or CN for that matter) take an eastern carrier. You can bet that both of them would have been ready to pounce if NS had even been halfway receptive to EHH back in late 2015.
2. I keep trying to stress this over and over but the only merger partner that really makes sense for CPRS is KCS/KCSM. It’s really not that difficult to figure out or grasp.
3. Don’t get me wrong. I have a ton of respect for Anthony Hatch. But is it possible for Trains to once, just once, find just another railroad consultant for his or her expert opinion on this subject?
The smart money would not be on a single merger. You would never get it past the regulators, shippers, and the court of public opinion. However, if you did another Conrail slice and dice, well….that just might work. Everyone gets a piece and you end up with several transcontinental railroads still competing. It is what I would do. Well if I were rich and owned millions in railroad stock.
They may be idiots, but they’re RICH idiots.
It’s foolish to be talking about mergers it’s not gonna happen. Why? The railroads will be too busy implementing Precision Scheduled Railroading…they won’t THINK about mergers. Keith Creel is an idiot period.
Do not thinkabout it at all
That is not going to happen at all. No and no how about no csx cp merger at all. I am not going to listen to it anymore about it. You leave csx alone. It will be rejected all made up dumbest decisions he made. Mind his own bussiness.
Likely that Anthony Hatch’s analysis is correct.
It will be nice when there’s just one railroad. It will be fun to listen to new creative BS about how “competition is what makes this country great-n-glorious”. Nothing more humorous than ideological BS.
Heck Jim, do you have any money not tucked away in a mattress? I have a 401k and I care a lot about what Wall Street thinks even though it scares the heck out of me because they can’t get past themselves and the next news cycle
.
On serious note, thanks Paul for a run down on the capitalization and return on the dollars as it seems to make more sense for publically traded companies to merge and swap shares.. In other words, think CSXCP just as you got BNSF. or maybe CSXKCS or NSKCS, KCS offers south of border industrial center & gulf chemical complex with East Coast population centers. I just think it is a matter of time before you see a merger, more likely, or acquisition in North America rail network..
It terms of acquisition, you have to wonder how much back of the napkin calculations Warren Buffet and Matt Rose, if got name right, did between themselves on various scenarios of BNSF buying out one of the other Class I railroads, did they look a true National east – west network with CSX or NS buyout, did they look at going north of the border and creeping eastward/getting another route into Chicago via CN, or maybe gobble up KCS and get a south of border connection/bigger piece of the gulf coast chemical complex traffic for a little one on one Texmex game against UP. Warren Buffet might be one of the last true titans who could come in acquire out right based on a multi decade plan on return, or until Amazon decides it wants to own a railroad for whatever dumb reason.
a shame – cp is a good railroad
CP market capitalization closed at $29.17 billion today (11/21/18), had about $7,8 million in long term debt as of 09/30/18, and looked to be on pace to earn, by December 31, 2018, in the neighborhood of $2 billion in Net Income for the year on Revenues in the neighborhood of $7 billion for the year. (Rough approximations.)
Purchase premiums can be in the 30% range, or more, for an acquisition, so CSX (the bigger of the two with $59 billion market capitalization) would have to come up with some package of somewhere in the range of $38-$40 billion, most likely, to acquire CP (if regulators approve).
I am probably missing something, but it would seem to me that at $2 billion additional net income per year on $7 billion in additional revenue, CSX would have to own CP for quite some time to make their money back, so to speak. Of course, they would be counting on that $2 billion incremental Net Income from owning CP to grow above that amount every year.
But it is a major chunk of change to come up with even to purchase just the smallest of the Big 6.
Paul Smith,
Actually idiots care what Wall Street thinks…just ask one Warren Buffet.
It will never happen, sounds like someone had a dream and got carried away.
“Who cares what Wall Street thinks?!”
Every Chief Executive Officer and Chief Financial Officer that is faced with financing an acquisition or merger for starters. Or issuing long-term debt! Or issuing new stock!
Or any person who needs capital for a start-up – includes venture capitalists, especially when the business gets to a point that it needs to go public to raise enough money to be a player in the big time. Think Microsoft, Apple, Dell, Tesla, etc. for openers.
Who cares what Wall Street thinks?!