Rail shippers split on outlook for Canadian Pacific-NS combination

What do rail shippers think of Canadian Pacific Railway's (CP) proposed $28 billion takeover of U.S. eastern railroad Norfolk Southern Corp. (NS)? Depends on who is asked.

CP said Thursday it has received more than 80 letters of shipper support for its proposal; of those, 62 were posted to the website of the Surface Transportation Board (STB), the U.S. federal agency that oversees rail mergers. According to Calgary-based CP, there have been three letters of shipper support for every shipper letter opposing it. The shippers whose names were posted on the STB web site were domiciled in the U.S. and Canada.

By contrast, an annual poll of rail shippers conducted by investment firm Stephens Inc. found that 70 percent of respondents opposed mergers of large "Class I" railroads, and only 10 percent thought a merger would occur within the next year. The firm said the respondents accounted for about $15 billion in annual rail spend. It declined to divulge any other details. The questions did not focus on any specific merger.

The quotes extracted for publication by Stephens reflected shippers' unhappiness with rail service reliability, rate increases, and the prospect for a further restraint on competition from more mergers. "Previous mega-mergers have benefited only the railroads themselves and their shareholders," said one shipper, who added that there "has been little to no sharing (with shippers) of mega-mergers and technological advances over the last 20 years."

Another shipper said that "railroads are too big to manage their own network as it is." The respondent said it is "difficult to believe that a single interchange point for cross-Mississippi traffic is really that inefficient, especially when many of the trains are run-through anyway and require no additional processing." That comment appeared to be a counterweight to CP's contention that a single line operating from Vancouver to northern Florida would add enormous value for the continent's rail shippers.

CP has made three offers to acquire Norfolk-based NS, but NS' board has rejected each one. Earlier this month, CP submitted a resolution to NS shareholders to ask their board to meet with CP. CP is also seeking what is known as a "declaratory order" from the STB to better understand the agency's views on the company's proposed voting trust model before an application is filed. CP has proposed to place itself in a voting trust to insulate itself from financial control of NS pending the STB's review of the combination. Under the proposal, E. Hunter Harrison, CP's CEO, would run NS. Keith Creel, Harrison's second-in-command, would run CP.

The proposed combination is opposed by the two western railroads, BNSF Railway Co. and Union Pacific Corp., and a cluster of shippers, shipper groups, organized labor, governments, and politicians. Perhaps the overriding concern is that the combination, if approved by regulators, would trigger the last spasm of rail consolidation, leaving the U.S. with only three large railroads (the third being Kansas City Southern, which operates along north-south U.S. routes and into Mexico.)

Rail shippers appear to have enough on their minds without having to manage the potential problems of a major integration. According to the Stephens survey, shippers, on average, expect a 2-percent decline in 2016 volumes and a 3-percent increase in rates, and that's after negotiating carriers down from their initial 4 percent proposed level of increase. Shippers also seem less concerned this year with capacity issues than they were in 2015; on a scale of 1 to 10 with 10 being "highly concerned," the average response was a 3. Last year, it was 7.