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The Beaver and The Thoroughbred


Let’s face it. Canadian Pacific (CP) isn’t going to quit efforts to merge or absorb Norfolk Southern (NS) until something or someone bigger or stronger tells them to go away, and that may not happen.

The latest legal ploy by CP is to ask the US Surface Transportation Board (STB) to issue a declaratory order as to the sufficiency of the voting trust structure proposed by CP to assure NS shareholders of the value of assets during the approval and transition process. While it seems Machiavellian, the structure has been used successfully in many past transactions before the STB. Worse, the request for declaration comes on the heels of NS’s decision that no talks will take place, citing the trust structure as the reason.

Really?

While I disagree that the merger (should we call it CPNS Railway in imitation of the successful merger of Burlington Northern and Santa Fe or BNSF?) is good for the railroad business and good for the country on many grounds (see below), NS’s position is somewhat like turning your back on a bully on the school playground and hoping the bully will back down. Sometimes the bully needs a good thwack across the nose.

I know that NS did not want this and does not need it to continue as a successful corporation. Though I have compared the merged corporation to disastrous mergers of the past, I did this only for sake of argument. My point was and is that this one won’t go down easily, even with a spoonful of sugar. But The Beaver (CP) isn’t going to go away. On the contrary, The Beaver is going to keep gnawing through tree trunks and building his dam until the flood behind it either floods the territory above the dam (the current railroad status quo) or breaks and floods the barn down below and drowns The Thoroughbred (NS and its shippers).

Maybe a little talking, with some reasonable counter proposals, would get The Beaver to step back a few feet from the dam and start thinking for a while. Right now, it’s an angry Beaver with its teeth sunk into a trunk that it feels it must gnaw through.

So enough of the metaphors. It’s widely thought that CPNS will trigger the last and final round of mergers of the big seven systems in North America. Those are: CP, NS, BNSF, Union Pacific, Kansas City Southern, CSX Transportation, and Canadian National. The only one of those with enough cash on hand to stand up and tell CP to go to Hell is BNSF. That might forestall the process until the US economy gets a little stronger, coal and oil get more certain, and we have some stability in the passenger network after the retirement of Joe Boardman from Amtrak this year. Ultimately, certainty in the political scheme after the election year would also be a plus.

When it (the final round) does happen, it will result in two or three coast to coast transcontinental railroads with a concurrent reduction in shipper choice and transportation competition. If, in 2017, we get a left leaning administration and a left leaning Supreme Court, the final round could result in the “open access” model where anyone with a train can run it on anyone’s track, for a price—good for competition but bad for the railroad business. And probably also bad for the United States. Once open access is in place, I can't see the government not wanting to control the track, and then the next step is pouring taxpayer dollars into it. It is bad enough we already do this with the Northeast Corridor.

I can’t even guess right now what the final system would look like. But I think the STB has more brains, as government agencies go, than we give them credit. I think the board will tell CP their trust model works, then go about properly vetting the merger, ultimately throwing it out unless major changes take place. The Beaver will keep on beav-ing, albeit with its tail between its stubby little Canadian legs, and The Thoroughbred will keep on frolicking in the green meadow—at least for the foreseeable future.

©2016 – C. A. Turek – mistertrains@gmail.com

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