Friday, June 22, 2012

Lines on a map do not a merger make

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While the railroad world waits for the Canadian Pacific Railway board of directors to name a permanent chief executive to succeed acting CEO Steve Tobias, some railfans are whiling away the hours speculating on the good things that would come from a merger of CP and Kansas City Southern Railway.

To you I say: Do not hold your breath.

Yes, CP and KCS do meet at Kansas City, and a combination of the two would be able to operate from Canada's industrial heartland all the way down through the middle of the United States and on through Mexico's industrial centers and to the port of Lazaro Cardenas on Mexico's Pacific coast.

So what?

I don't see either CP or KCS entering into such an arrangement for the simple reason that I don't see either of them benefitting from such an exercise.

Rail mergers, of which I've been involved in more than one, make sense not because the maps show that they meet. They make sense when one or both parties gain access to markets not now served or when one or both gain traffic that improves their revenue and earnings.

KCS and CP can achieve whatever growth there might be by the simple and old-fashioned vehicle of trackage and haulage rights.

Of the seven North American Class I railroads, KCS is the only one with a basic north-south route system (I learned that from looking at a North American rail system map). So any traffic that wants to go from Mexico to Canada, or reverse, is likely to go via a combination of KCS and CP. But what about Canadian National? CN does much the same that CP does, only it provides single-line service thanks to its acquisition of the former Illinois Central. It runs north-south to the east of the Mississippi River, while KCS runs north-south to the west of the Mississippi. CN does not get past New Orleans.

There's another, equally significant reason why you should not lose sleep worrying that KCS and CP might merge. Mike Haverty, now KCS's executive chairman, has done a splendid job of making KCS a relevant member of the railroad fraternity.

In addition to an improving north-south operation, Haverty managed to get Norfolk Southern to provide capital for an upgrading of the KCS east-west line from Meridian, Miss., through Jackson, across the Mississippi River to Shreveport, La., and on to Dallas/Fort Worth.

The Meridian Speedway, as it is called, is a splendid bridge for traffic moving between the BNSF and Union Pacific systems in the West and NS in the East. It's shorter and faster than other routes for growing intermodal volume to and from the Southeast.

Haverty seems willing to try different things and generally turns out to be right. Remember, it was Haverty who negotiated the deal with J. B. Hunt that put Hunt's trailers on Santa Fe intermodal trains and made both companies more than they had been before.

I think Haverty would sell the KCS—or urge his board to consider a sale—in a heartbeat, but he has said he is focused on creating value for his shareholders. To sell, he'd want a premium price that CP probably would not be willing to pay. Besides, CP has enough existing needs that it probably doesn't have the capital to pull off such an acquisition. Nor would Haverty be any more likely to try to buy CP, which still is struggling to become as efficient and profitable as the railroads with which it already competes.

All those who are interested can go back to speculating on who might become the CP CEO—and when.

Larry Kaufman

Larry Kaufman is a veteran transportation journalist and commentator and a Contributing Editor to Railway Age.