Regulatory risk a red signal to rail mergers, investors told

NEW YORK – Executives from Canadian National, CPKC, CSX and Norfolk Southern poured cold water on talk about potential Class I railroad mergers during an investment conference this week.

Mergers have become a hot topic in some railroad boardrooms in recent months amid stagnant rail volume, revenue and stock prices. Some see a U.S. transcontinental merger as a way to jump-start volume and earnings growth.

CPKC (NYSE: CP) Chief Executive Keith Creel, who put together the historic 2023 merger of Canadian Pacific and Kansas City Southern, said the Surface Transportation Board’s tougher 2001 merger review rules are an insurmountable barrier.

“There’s always been an argument why it could make sense, but the arguments would have to be able to ignore the regulatory risk that is undeniably there,” Creel told the Wolfe Research 18th Annual Global Transportation & Industrials Conference Wednesday.

The CP-KCS deal was judged under the STB’s old merger review rules.

“The standards that we had to meet to get our deal approved pale in comparison to the standards that are untested in the new merger rules: To create a network that not only protects competition, but enhances competition, that protects service and enhances service,” Creel said. “There is … not a hill of regulatory risk to climb. There’s mountains of regulatory risk.”

And that risk, he said, outweighs any benefits that might flow from a transcontinental merger.

“So quite frankly, I don’t think it’s necessary. I don’t think it’s needed. I don’t think it’s realistic.”

The CP-KCS merger boosted competition, prompted other railroads to launch new interline cross-border service, and was accomplished without the service problems that followed the Union Pacific-Southern Pacific merger and the CSX and Norfolk Southern split of Conrail three decades ago. Could CPKC serve as a template for a transcontinental merger?

No, Creel said, because there was zero overlap between the CP and KCS systems, so no customers were left with fewer rail options — and shippers wound up with more rail choices. “Those facts simply don’t exist with any other proposed merger that might be out there,” Creel said.

CN (NYSE: CNI) Chief Executive Tracy Robinson said industry chatter about mergers — something she says has always existed — increased after President Donald Trump was elected.

“But as you look at it from a rail perspective, the bar is pretty high,” she told the conference on Tuesday, noting that the merger review rules require railroads to show their combination would improve — rather than merely not harm — competition.

“So that’s a high bar. That doesn’t mean that it’s not possible and someone won’t take a run at it.”

“You never say never on any of these, which is why there’s still chatter. And so I’m sure that everyone does the game theory around the different kind of combinations and permutations,” Robinson said of railroads sizing up their potential merger partners and scenarios. “And that’s the right thing to do from a governance perspective. We should always be looking at the best way to serve our customers, and there’s different ways to do that.”

CN is nurturing interline partnerships that aim to replicate single-line service. In the past two years, CN has launched new interline intermodal service with Union Pacific and Ferromex to reach Mexico and with Norfolk Southern to reach Kansas City and Atlanta.

“Right now, we’re pretty focused on making sure that we’re serving our customers well. … The best way to do that is with the right kind of partnerships with our connecting railroads, whether it’s short lines or Class I’s,” Robinson said.

Norfolk Southern (NYSE: NSC) Chief Financial Officer Jason Zampi said he can see the advantages of a railroad that stretches coast to coast.

“I see a lot of benefit in a transcon merger. 
I think there could be a lot of synergies there and cost takeout,” Zampi said at the conference Tuesday. “But I also view the regulatory framework as pretty challenging right now.”

That said, does the Trump administration’s pro-business, anti-regulatory stance mean the timing might be right for a pair of Class I railroads to make the first attempt at a merger under the STB’s 2001 rules? “I don’t know. We’ll see how it shakes out,” he said.

But right now Zampi says NS is focused on its core strategy of boosting productivity while providing reliable service that will lead to growth in volume, revenue and profits.

CSX (NASDAQ: CSX) Chief Commercial Officer Kevin Boone said mergers are not required to boost railroad stock prices, which have been relatively stagnant the past few years.

“We think there’s a lot of untapped value that we can control and drive from a share price perspective,” he told the conference, adding that a merger is not the focus of the CSX management team.

Last month Union Pacific Chief Executive Jim Vena told Trains that a transcontinental merger would improve service, divert freight off the highway, and help U.S. exporters and importers better compete in global markets.

Vena also contends that a Class I merger proposal could gain STB approval when the timing is right.

“I’ve always thought that it was possible,” he said. “Now whether we’re in the right situation with everything – who knows and we’ll see what happens.”

BNSF Railway told Trains that it doesn’t see a catalyst for a merger, noting that customers, policymakers and communities don’t favor further consolidation in the rail industry.

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