Burlington Northern Santa Fe Corp. agreed Monday to merge with Canadian National Railway Co. to form North America's largest railroad. But the announcement instantly raised questions about whether this combination can avoid the snags that have derailed other recent railroad mergers.
The proposed marriage of Burlington Northern Santa Fe, based in Fort Worth, and Montreal-based Canadian National would create a railroad with 50,000 miles of track, annual revenue of $12.5 billion and 67,000 employees, enabling it to eclipse Union Pacific Corp. as the continent's biggest railroad.
The merged railroad also would have enormous reach, stretching from Los Angeles to Halifax, Nova Scotia, and from the Gulf of Mexico to Vancouver, British Columbia. The deal also would give shippers a single carrier for moving goods among the three nations that have stepped up trade via the North American Free Trade Agreement.
The deal would meld Burlington Northern's strengths in hauling coal and intermodal containers with Canadian Railway's leading positions in shipping forest products, autos and chemicals.
But if it does run into trouble, the ripples could well be felt in Southern California. Burlington Northern is a major carrier in California, with routes that run from San Diego to Los Angeles and north to Oregon, virtually dissecting the state. The proposed deal--which involves an exchange of stock and values Canadian National at about $5.6 billion--is the latest in a flurry of railroad mergers in recent years. The railroads have joined forces largely to compete more effectively against the trucking industry in North America.
But many railroad mergers have failed to produce the cost savings, accelerated growth, better service and greater profits that mergers were expected to generate. And so the same promises from Burlington Northern and Canadian National received a wary greeting Monday.
"Absolutely, it's a legitimate concern as to whether this merger can succeed where others haven't," said Mark Reutter, editor of the journal Railroad History in Urbana, Ill.
He pointed to the most recent highly touted deal, in which the two other major U.S. railroads, Norfolk Southern Corp. and CSX Corp., effectively carved up the operations of Conrail Inc. last summer. The companies have struggled since to integrate Conrail and their earnings have suffered because of disruptions and added expense.
Indeed, CSX on Monday warned analysts that its fourth-quarter earnings will come up well short of expectations, in part because of ongoing congestion on the former Conrail lines it's absorbed.
Then there was the debacle in 1997-98 after Union Pacific's purchase of ailing Southern Pacific Rail Corp., in which massive congestion on Union Pacific's routes sparked a national shipping crisis for several months.
Burlington Northern, too, has suffered snags stemming from its purchase in 1995 of Santa Fe Pacific Corp., which gave the railroad its entry into California.
Burlington Northern Santa Fe and Canadian National are known "to go more slowly than other railroads" in absorbing merged lines, which has meant "fewer problems," said Frank Wilner, a Washington-based historian and editor of Rail Intelligence newsletter.
Yet that's also meant Burlington Northern has been slower to achieve "synergies" from mergers that are supposed to boost service and profits, and that's a frustration for investors, Wilner said.
That's one reason Burlington Northern's stock price has dropped 9% in the last two years while the broader market has roared ahead. Publicity about the other railroads' merger woes also have weighed on all of the sector's stocks.
Burlington Northern closed Monday at $24.81 a share, down $3.56, while Canadian National's U.S.-listed stock lost 69 cents a share, to $29.06, both in New York Stock Exchange composite trading. In after-hours trading, Burlington Northern recovered a bit to $26.22.
However, Burlington Northern's chairman, Robert D. Krebs, said in a statement that the deal represents "a new model" of railroad merger, one that "preserves and protects the existing identities and efficient rail networks of each company," but still provides cost savings and other benefits.
And Reutter said the merger would give Burlington Northern "an incredibly strong presence on the West Coast," with access to the major ports in Los Angeles/Long Beach and Vancouver and in the Seattle/Tacoma/Portland ports in the Pacific Northwest.
The deal is subject to regulatory review in both countries, and analysts said that in light of the problems with other rail mergers, the U.S. Surface Transportation Board will be under pressure to closely scrutinize the companies' proposal.
The complex "merger of equals" would involve creating a new Canadian-based parent for Burlington Northern, called North American Railways Inc., intended to allay Canadian concerns about a takeover of the railroad by a U.S. corporation. Burlington Northern would retain its Fort Worth headquarters, however.
The deal calls for Burlington Northern holders to swap each of their existing shares for one security that combines one share of North American Railways and one Canadian National voting share.
Canadian National holders, in turn, would get 1.05 of a share of North American Railways Inc. or 1.05 shares of Canadian National stock, exchangeable for North American Railways shares.
Canadian National's chief executive, Paul M. Tellier, would be chief executive of North American Railways as well, while Burlington Northern's Krebs would be a nonexecutive chairman of North American Railways and of Canadian National.
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The potential success of Burlington Northern Santa Fe's proposed merger with Canadian National Railway is being questioned because several other rail mergers, including companies such as Union Pacific and CSX, have failed to boost the companies' profits and stock prices. Monthly closes and latest:
Note: Canadian Railway stock reflects shares traded on the New York Stock Exchange.
Source: Bloomberg News