BNSF has jumped into the fray over the proposed Canadian Pacific-Norfolk Southern merger with BNSF Executive Chairman Matt Rose saying that his company has spoken with NS and CSX about possible merger activity.
Rose also indicated that if the CP bid to acquire NS appears to be moving ahead, then BNSF will become a player in the merger game.
Rose has been making the rounds of late to speak about possible Class 1 railroad mergers, giving interviews with Bloomberg TV Canada and Trains magazine columnist Fred Frailey. Rose also has addressed Wall Street Analysts in a conference call.
Cowen & Company Managing Director Jason Seidl told Railway Age that he believes that “Norfolk Southern shares will outperform and that investors will start to look at eastern rival CSX.”
Siedl noted that Warren Buffet, whose Berkshire Hathaway owns BNSF, “is paying attention” and has long been enamored with the railroad sector.
“If CP’s overtures toward NS come to fruition, we believe that other railroads will be forced to scramble to match the scale and product offerings of their newly-formed transcontinental peer,” Seidl said. “This could push the industry from seven Class I’s (BNSF, CN, CP, CSX, Kansas City Southern, NS, Union Pacific) to four.
Some analysts believe that Rose has been speaking out as a way of giving notice to the Surface Transportation Board that the “end game scenario” may be at hand.
Seidl said that CP has more to offer NS to entice it into a merger and that other railroads may show interest in merging with NS. He said that merger talk comes as a time when railroads have been posting lackluster carload volumes.
In his conversation with Wall Street analysts, Rose said BNSF would seek to acquire another railroad if CP and NS file a merger application.
Earlier in the week, CP CEO E. Hunter Harrison downplayed the possibility that a CP-NS merger bid would trigger a round of railroad consolidation.
“I don’t see it as automatic that they’ve got to merge,” Harrison told Wall Street analysts. “I just think it’s a lot of rhetoric about nothing.”
Rose hasn’t ruled out BNSF making a bid to acquire NS and would have the ability to outbid CP in a bidding war because Berkshire Hathaway has a “war chest” of $66 billion in cash.
In his interview with Frailey, Rose hinted that if CP-NS consummated their merger then BNSF would seek to merge with CSX.
Rose said a CP-NS merger would result in NS’s profits being taxed at Canada’s lower corporate tax rate, thus putting CSX at a competitive disadvantage.
Yet Rose said he would prefer not to play the merger game. “I always put myself in the minds of my customers,” he said. “I just sense customers feel there has been too much consolidation and too much market power put in the hands of railroads.”
Analysts have noted that an application to the STB for a railroad merger would trigger a “downstream effects” review to discern how the industry might react. That provision was part of the merger rules that the STB promulgated in 2001.
The STB said the “downstream effects” rule gives the board, “the information needed to rule on what would likely be the first step in an end-game situation in which only two or three competing transcontinental railroads would remain in North America.”
NS has thus far rebuffed CP’s acquisition overtures and even trotted out a white paper by two former STB members that argues that the board is unlikely to approve a CP-NS combination.