Two major rail operators have taken themselves out of the merger game that has gripped the industry for the past month, reshaping the competitive landscape and raising the regulatory stakes for Union Pacific’s proposed $85 billion tie-up with Norfolk Southern.
Canadian Pacific Kansas City joined Warren Buffett’s BNSF Railway BNSF Railway on Tuesday in publicly rejecting participation in any near-term rail industry consolidation.
The move makes it less likely that a proposed $85 billion merger last month between top U.S. railroad operator Union Pacific and Norfolk would lead to more corporate marriages.
The merger would create the first east-west U.S. railroad operator, reshaping the movement of goods ranging from grains to autos across the country. The news raised concerns about market concentration and prompted heated speculation that rivals would need to join forces to remain competitive.
REGIONAL DUOPOLY
The U.S. rail industry has already undergone significant consolidation in recent decades, shrinking from dozens of carriers to six major class I railroads.
The U.S. freight rail industry is dominated by four top U.S.-based carriers – two in the west and two in the east. That means shippers have only two carrier options considering the point of origin.
Top railroad operator Union Pacific, which primarily operates in the west, proposed to join Norfolk, which has a strong foothold in the east. Initially, this prompted speculation that the other two U.S.-based railroad operators – BNSF Railway in the west and CSX in the east – could merge to stay competitive against a coast-to-coast giant.
That game has changed in the past days. First, Buffett-backed BNSF dropped out.
Two large Canadian railroad companies also operate in the United States. Canadian Pacific, the only one with a tri-national network, would be the next viable candidate to merge with CSX. But Tuesday’s announcement left CSX without a viable partner for a large merger.
HIGHER REGULATORY RISKS
The reduced chances of a consolidation wave raises the regulatory risks for Union Pacific’s attempt to buy Norfolk and go coast-to-coast.
If this was the only deal under review by the U.S. Surface Transportation Board, regulators would have greater concerns because a single large operator could muscle out smaller regional operators.
Expectations were different last month. When Union Pacific and Norfolk Southern disclosed they were in talks last month, board officials were gearing up to review two megamerger proposals, a person close to the discussions previously told Reuters.
The board’s review is expected to take 17 to 22 months.
CANADIAN PACIFIC
In a statement, Canadian Pacific said it did not believe additional consolidation is necessary and warned that a transcontinental merger could “trigger permanent restructuring” of the industry and lead to “an unnecessary wave of railway mergers.”
“Any major rail merger poses unique and unprecedented risks to customers, rail employees and the broader supply chain,” CEO Keith Creel said in the statement.
Buffett and Berkshire Hathaway Vice Chairman Greg Abel met privately with CSX CEO Joseph Hinrichs on August 3, but made clear they were not pursuing a merger, Berkshire confirmed in an email to Reuters, following a CNBC report.
Instead, the two companies announced new coast-to-coast intermodal service last week, signaling a preference for operational cooperation over consolidation.
“Many of the kinds of benefits asserted in support of transcontinental mergers can be achieved through new and expanded industry partnerships,” CEO Creel said.
Canadian Pacific, he said, continues to pursue these opportunities, such as its recently announced collaboration with CSX on the Southeast Mexico Express service linking the U.S. Southeast to Mexico.
Canadian Pacific’s stance aligns with BNSF, which on Monday also ruled out merger participation, citing similar concerns about industry disruption and regulatory uncertainty.
Union Pacific has a stronghold in the western two-thirds of the U.S. with Norfolk’s 19,500-mile (31,400-km) network that primarily spans 22 eastern states.
Norfolk said Union Pacific would pay a termination fee of $2.5 billion cash if the deal was terminated under specific circumstances.
CSX said on Tuesday it continues to explore additional service options that will efficiently improve transcontinental service.
“CSX’s board and management team are focused on exploring any and all opportunities to enhance shareholder value,” as illustrated by the intermodal service agreement with BNSF announced last week, the company said in a statement.
(Reporting by Sabrina Valle in New York; Editing by Dawn Kopecki and Richard Chang)