BNSF CEO: CP-NS merger would beget further consolidation

Matt Rose, chairman and CEO of BNSF Railway, said a deal between Canadian Pacific and Norfolk Southern is unlikely because it would require buy-in from investors, rail labor, customers and public policy makers.    As talk continues to swirl about the next move for the Canadian Pacific railroad as it attempts to merge with Norfolk Southern, the head of one of the biggest North American railroads said Tuesday that the deal lacks impetus for two key reasons.
   “There’s never been one merger in the industry,” BNSF chairman and CEO Matt Rose Rose said at the Stifel Transportation and Logistics conference in Miami. “There are always two.”
   Rose said that for a merger of the magnitude of the mooted CP-NS tie-up to go forward, four constituencies have to be onboard: investors, rail labor, customers and public policy makers.
   “I’m not against having two big transcontinental railroads, if that’s that the four groups want,” Rose said. “I just don’t see the other three groups [aside from investors] being interested in that.”
   Rose said that rail mergers, by and large, work well because networks tend to necessitate less rationalization after the initial hiccups common in major mergers.
   But he also said that the industry “is a long way from any railroad needing to merge out of financial necessity.”
   Canadian Pacific earlier this week shifted its tactics in its very public takeover attempt of Norfolk Southern Corp., submitting a resolution to NS shareholders to ask the railroad’s board of directors to enter into good faith negotiations regarding a merger rather than taking its $30 billion stock-and-cash offer directly to NS shareholders and engage in a proxy fight to replace existing management as it had threatened previously.
   NS responded to the non-binding shareholder proposal in a statement, saying “NS has already met with CP and publicly provided clear detail regarding the NS Board’s concerns. While CP continues to publicly declare that NS should ‘talk to CP about a potential combination,’ we believe further discussions are not in the best interests of NS shareholders unless CP offers NS shareholders compelling value and addresses the regulatory issues inherent in its proposal.
   “The NS Board carefully considered and unanimously rejected each of CP’s three unsolicited acquisition proposals, after it determined that each was grossly inadequate and would face substantial regulatory risks and uncertainties that CP would be highly unlikely to overcome,” NS added. “Notably, CP has not addressed the NS Board’s concerns, nor sought a declaratory order from the Surface Transportation Board that would provide clarity regarding the likelihood of regulatory approval of its voting trust structure.”
   In a wide-ranging Q&A with Stifel Transportation & Logistics Group Managing Director John Larkin, Rose touched on the factors driving intermodal traffic, and whether softness in the U.S. trucking market is influencing freight rail demand.
   Rose said he’s confident in BNSF’s intermodal growth prospects based on three key fundamentals: a lack of investment in the U.S. highway system, population growth, and carbon reduction regulations.
   All three dynamics will push freight to rail, he said.
   When asked whether BNSF was losing freight to the less-than-truckload market due to weak demand and pricing in that mode, he said a little bit of freight is being diverted back to LTL.
   “But I see that changing when the economy picks up,” Rose said.
   He did add that LTL carriers are moving some shipments that might have ordinarily gone intermodal over the road to keep drivers engaged, even though it’s more expensive to do so. The implication is that a short-term loss on some pieces of freight will result in better driver retention when the market picks back up and capacity shrinks.