10 March 2009
Working on the Railway Deals Gets Tougher
In railway circles, there's always been a sense that the
industry hasn't quite finished sorting itself out.
Nine years ago, Canadian National Railway proposed a tie-up with Burlington Northern Santa Fe that would have created
North America's largest rail network, and forced rivals such as Canadian Pacific into unions of their own.
CN's US$2.4-billion merger plan was shut down by regulators at the U.S. Surface Transportation Board, or STB, but the
agency's 15-month moratorium on deals expired long ago. Given the customer clout and savings that come with combining
forces, there's always been a sense that CN, or one of the five other major railways, would try to cut a new deal.
That tension is not lost on U.S. lawmakers, who moved last week to make a railway merger much more difficult to contemplate.
The U.S. Senate voted last week to remove antitrust exemptions enjoyed by the railway industry, and make any future mergers subject to
Department of Justice approval. That scrutiny would be in addition to the STB's deal-killing authority.
Critics say this is a step backward for the industry. "The legislation is undesirable and it could lead to additional lawsuits
accusing the railroads of collusion," JP Morgan analysts said in a report. The dealer said: "If the Rail Antitrust
Bill passes, it would create greater uncertainty regarding future approval of railroad acquisitions."
In JP Morgan's view, the regulatory uncertainty doesn't affect short-term valuations on CN and CP, as neither was on the
verge of a deal. But in the future, a harsher regulatory regime will weigh on both Canadian railways, with CN seen as a buyer, and CP
as a target.
JP Morgan did note that the Senate move "could be viewed as a negative for Kansas City Southern, which on occasion is viewed as a
takeout candidate by one of the large six North American railroads."
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