Western Railroad Discussion > Eyes on BNSF for Merger's.

Press reports suggest BNSF Railway, awash in cash, may be considering new merger opportunities that would give it significantly increased market power and a truly North American presence in Mexico, the U.S. and Canada.
An international rail consultant was quoted Nov. 16 by the Canadian Press saying that BNSF may again attempt a merger with Canadian National Railway, which also controls the former Illinois Central, Grand Trunk Western and regional railroad Wisconsin Central.

An article in a transportation law publication in November speculates BNSF may make a grab for Kansas City Southern, which also controls the Tex-Mex and Mexico's TFM railroad.

Rail mergers have been devastating to rail employment. As the number of Class I railroads declined from 39 in 1980 to 7 today (due mostly to consolidations), the number of Class I railroad employees has declined from 458,000 in 1980 to under 155,000 today.

Those who follow mergers have their eyes on BNSF.

Wall Street analysts report that BNSF will have some $2 billion in so-called "free cash" to spend over the next 26 months. That cash could be spent increasing the dividend paid investors, buying back its own stock (which reduces shares available and lifts the stock price), or on acquisitions.

BNSF is North America's second-largest railroad (to Union Pacific), operating some 32,000 miles of railroad and collecting some $10 billion annually in freight revenue. (UP operates slightly more mileage than BNSF, but earns some $12 billion in freight revenue annually. A BNSF combination with KCS or CN could propel BNSF ahead of UP.)

According to international railroad consultant Charles Banks, CEO of R.L. Banks and Associates of Washington, D.C., the most logical partner for CN would be BNSF. (In 2000, BNSF and CN voluntarily canceled merger plans after U.S. regulators imposed a 15-month freeze on railroad consolidations while new rules were written.)

Meanwhile, a publication of the Association of Transportation Law Professionals (the bar association of the U.S. Surface Transportation Board), carried an article suggesting BNSF may have interest in acquiring KCS.

Some analysts think a BNSF/KCS combination is much more likely than a renewal of the BNSF/CN consolidation.

The reason could be KCS' Meridian Speedway, KCS' control of the Tex-Mex, and KCS' subsidiary TFM, a major Mexican railroad running from Laredo, Texas, to Mexico City and serving key Mexican ports at Monterey (east coast of Mexico) and Lazaro Cardenas (west coast of Mexico).

The KCS Meridian Speedway -- linking Meridian, Miss., with Dallas -- is the fastest growing and least congested rail route in America.

KCS' Tex-Mex subsidiary links Houston to the busiest U.S.-Mexico border crossing at Laredo.

BNSF is said to be especially interested in rail access -- through KCS and TFM -- to the Mexican port of Lazaro Cardenas, on the southwest coast of Mexico.

TFM controls all tracks into and out of the Port of Lazaro Cardenas, and is spending $12 million to improve its rail-monopoly access.

The Port of Lazaro Cardenas is 600 rail miles closer to Houston than the severely congested mega-ports of Long Beach/Los Angeles; Lazaro Cardenas is only 200 miles further from Chicago than Long Beach/Los Angeles; and the Port of Lazaro Cardenas is the closest to Mexico City, whose population is some 22 million.

Labor costs are said to be 30 percent cheaper at the Port of Lazaro Cardenas than U.S. ports, which has attracted the interest of retail giants such as Wal-Mart. It is reported that Wal-Mart is working with ocean carrier Maersk to invest in additional port capacity at Lazaro Cardenas, and terminal operator Hutchison Wampoa already is in the process of increasing the port's capacity 10-fold.

Meanwhile, the Wall Street firm of UBS projects TFM rail-freight revenue associated with port traffic will grow from $29 million to as much as $225 million by 2025 because of Lazaro Cardenas port expansion and increased Asian imports.

UBS projects the Port of Lazaro Cardenas will be handling some two million containers by 2025, which compares to nine million now at Long Beach/Los Angeles and under two million now at the ports of Oakland, Calif., and Seattle.

All mergers involving U.S. railroads must be approved by the U.S. Surface Transportation Board, which, with very few exceptions, has approved most rail mergers presented to it, notwithstanding substantial opposition by shippers and rail labor.

For example, over the past two decades, Union Pacific gained approval to acquire the former Western Pacific, the Missouri Pacific, the Chicago & North Western, and the Southern Pacific.

BNSF, meanwhile, is the combination of the former Burlington Northern and the Atchison, Topeka & Santa Fe.

Among the very few rail mergers rejected by the U.S. Surface Transportation Board was the 1984 proposed merger of the Santa Fe with the Southern Pacific. And, as mentioned, BNSF and Canadian National voluntarily canceled their merger attempt in 2000.

BNSF+KCS I can see and MAYBE BNSF+CN but no way its BNSF+NS for the following reason...

...because the competitive response merger of CSX+UP = nightmare! Even if a NS+BNSF merger would come first and could walk on water in the eyes of shippers/STB, the new merger rules would essentially force them to admit that the end result would be CSX and UP merging in response. The minute the STB and shippers heard that, that merger would be dead in the water as well.

BNSF+KCS will just force the remaining 74% (or at least enough for a majority) of Ferromex UP doesn't already own, to be bought by UP.

If it becomes BNSF+KCS, they might as well get ready to hand over the entire Gateway Western to the CSX because it's pretty much guaranteed that line sale would be a condition of the merger.

AaronJ

And the competitive response to BNSF+CN will be UP+CP, and I believe that could just as easily be the other way around, i.e. UP+CP going first. Now that the CSXT ex Pere Marquette from Detroit to Chicago is going to be a branch line witht he exodus of CP trains, I wouldn't be surprised to see it on the CSXT for sale list either. The lack of "owned" rails between DET-CHI has always been problematic for CP (at least since 1985 when through trains began running via trackage rights). When the next "big bang" hits, CP in the east will sink or swim based on a Detroit-Chicago connection because NS will lose interest in CP's overhead trains via Butler.

Has anyone considered a Conrail like scenario where the map could be redrawn in unforseen ways ??

M-636 Wrote:
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> Has anyone considered a Conrail like scenario
> where the map could be redrawn in unforseen ways
> ??

I believe most Class 1 executives have considered this as a potentiality. The scenario they're most concerned about has a new round of mega-mergers prompting some form of reregulation or open access, and so I don't think any new big mergers are likely because of this threat.

M-636 Wrote:
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> And the competitive response to BNSF+CN will be
> UP+CP, and I believe that could just as easily be
> the other way around, i.e. UP+CP going first.
> Now that the CSXT ex Pere Marquette from Detroit
> to Chicago is going to be a branch line witht he
> exodus of CP trains, I wouldn't be surprised to
> see it on the CSXT for sale list either. The lack
> of "owned" rails between DET-CHI has always been
> problematic for CP (at least since 1985 when
> through trains began running via trackage rights).
> When the next "big bang" hits, CP in the east
> will sink or swim based on a Detroit-Chicago
> connection because NS will lose interest in CP's
> overhead trains via Butler.
>
> Has anyone considered a Conrail like scenario
> where the map could be redrawn in unforseen ways
> ??
>
>
>
>

Then they could rename it "North American Pacific".....and take a NAP :)

M-636 Wrote:
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> When the next "big bang" hits, CP in the east
> will sink or swim based on a Detroit-Chicago
> connection because NS will lose interest in CP's
> overhead trains via Butler.
>

I thought CP had trackage rights between Chicago and Detroit (vs haulage on the CSX and CN). In the case of trackage rights, NS doesn't really have much say in refusing to let any CP trains run on them. Correct me if I'm wrong, but the CP has limited haulage rights on the CN/GTW, but can run as many trains via haulage rights (lower limit is one each way I believe) on the CSX as well.

AaronJ

AaronJ Wrote:

> I thought CP had trackage rights between Chicago
> and Detroit (vs haulage on the CSX and CN). In
> the case of trackage rights, NS doesn't really
> have much say in refusing to let any CP trains run
> on them. Correct me if I'm wrong, but the CP has
> limited haulage rights on the CN/GTW, but can run
> as many trains via haulage rights (lower limit is
> one each way I believe) on the CSX as well.
>

CP has Trackage Rights on NS, not Haulage Rights. The agreement on the GTW was restrictive and not a solution in itself but was a band-aid for problems on the CSX Haulage Rights. The CSX Rights require a certain number of cars per week. CP intends to operate three EBs per week to satisfy the requirements, The EBs hauling mostly empty containers are less sensitive to poor CSX service. I can believe that the move to trackage rights on NS is a pressure move against CSX and CP might be interested in buying the old Pere Marquette line. Of course CSX might not want to sell it to CP in spite. But money talks and B**S walks. CP will have money available in 2006 as they have no major capacity projects planned, just some small tweaks. Of course they don't have nearly the money that CN or BNSF does but they do have more than CSX, and could probably offer more than any Shortline would for the Pere Marquette. The only downside is the line would require significant cash to upgrade.

CP may be able to get trains from Detroit to Chicago, but when you're on the other guy's rails you have no control. CP has been fighting with CSXT for 20 years about lack of available crews and all the while trains sat. Now CSXT is all bent out of shape because CP finally got another option.

"If it becomes BNSF+KCS, they might as well get ready to hand over the entire Gateway Western to the CSX because it's pretty much guaranteed that line sale would be a condition of the merger."

Why is this guaranteed? Why hasn't CSX already gone after this line? The KCS has little traffic on it now. How would it fit in with the rest of CSX?
Thanks,
E0

I think we have passed the point where the efficiency gained from continued mega mergers does NOT offset the loss of momentum the entire system endures. Most recent mergers have cost more than they produce in gains.

But then again, I say let'em merge, collapse, and be reborn as new carriers who own various segments of the larger system.

It would be better to do a trackage swap, ie UP getting a northern route and the ex BN between Chicago and KC and BNSF getting more access to the chemical areas and a better deal in the central corridor. It would be better to forget about mergers and increase the capacity on the ex Santa Fe.

The $2 billion would be better spent on increasing capacity on existing BNSF lines.


Pepperidge

Nbetween Wrote:
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> For example, over the past two decades, Union
> Pacific gained approval to acquire the former
> Western Pacific, the Missouri Pacific, the Chicago
> & North Western, and the Southern Pacific.


Everyone always forgets poor Miss Katy.
:-(

Off-pending Wrote:
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> "If it becomes BNSF+KCS, they might as well get
> ready to hand over the entire Gateway Western to
> the CSX because it's pretty much guaranteed that
> line sale would be a condition of the merger."
>
> Why is this guaranteed? Why hasn't CSX already
> gone after this line? The KCS has little traffic
> on it now. How would it fit in with the rest of
> CSX?
> Thanks,
> E0

Uh, its called Kansas City and CSX has no access to it right now. BNSF already has the ability to go between St Louis and KC and it would be pretty easy for CSX to make the claim it should have its own route to get into KC in order to stay competitive with NS which has the old Wabash. Given that the new STB rules requires any merger to "enhance" competition/public good, it doesn't take much to see that the Gateway Western would have to be sold to CSX otherwise they'd be decreasing the number of carriers running between KC and St Louis and hence not providing increased competitions/public good. It's not a matter of if in this case, just when.

AaronJ

I don't understand why BNSF would merge with CN, isn't the dream of the big class 1's to have one line service from sea to shining sea!!

I can't see anything more than a BNSF+KCS merger at this time. The STB won't let UP and CSX get caught flat-footed again. Not only that, I think all the class 1's have plenty more market opportunities on their own systems yet.

fmw Wrote:
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> I can't see anything more than a BNSF+KCS merger
> at this time. The STB won't let UP and CSX get
> caught flat-footed again. Not only that, I think
> all the class 1's have plenty more market
> opportunities on their own systems yet.

The only exception is Ferromex which UP already owns 26% of the company. BNSF+KCS will just mean UP would purchase either enough to have a majority or the entire remaining 74% of Ferromex.

AaronJ

You will NEVER see a CN+BNSF merger happen. This proposal was shot down in 2000 and will be shot down again by the STB in a heartbeat if presented. Imagine a 50,000+ route mile system, trying to manage it woul dbe IMPOSSIBLE!
Rob Krebs said it was impossible to manage his big BNSF empire from centralized Fort Worth several years ago and preceded in de-centralizing dispatching functions. Many lines would be abandoned, sold or downgraded in such a senario and many people would be laid off or relocating to keep jobs. In short I hope this NEVER happens; I'm reasonably sure it will not. Certainly the customers would be crying bloody murder about it! BNSF has not taken good care of grain customers in the midwest; CN keeps raising care rates and claims to have problems with car shortages.