By Nick Carey
CHICAGO, Jan 19 (Reuters) - A legal protest by Canadian
Pacific CP.TO over a meeting among big U.S. railroads about
mergers in their industry has highlighted maneuvering in the
sector to cope with a rapid downturn and possible consolidation.
Canadian Pacific Railway on Tuesday asked the U.S. Justice
Department to look into statements by U.S. railroads, in the
wake of the meeting, about "working closely with each other to
block" its bid for Norfolk Southern Corp (N:NSC) NSC.N .
The U.S. railroads met late last year in the presence of
lawyers, saying they merely discussed a merger's impact on the
industry. Interviews with U.S. railroad executives show some
oppose mergers, others tout possible benefits.
Tuesday's flap, where Canadian Pacific accused U.S.
railroads of adopting an "anticompetitive" strategy, shed light
on chances for further consolidation, with eyes on No. 3 U.S.
railroad CSX Corp CSX.O as a future target.
"If Canadian Pacific's bid for Norfolk Southern goes ahead,
then CSX will be the next domino to fall," said Scott Rostan,
who worked on the Merrill Lynch team advising Norfolk Southern
during its battle with CSX in the 1990s for control of Conrail,
which was ultimately carved up between them.
Canadian Pacific in mid-November disclosed its $28 billion
offer to buy Norfolk Southern.
The bid coincides with a "freight recession" as falling
commodity prices hurt North America's railroads. On Tuesday
Moody's Investors Service warned of "increasing risks of an
industrial recession" for North American manufacturers. Canadian
Pacific, like the broader Canadian economy, is fairly reliant on
commodity exports.
Some analysts see its Norfolk Southern offer as an
opportunistic bid for a growth story while rail stocks are down.
The No. 4 U.S. railroad has rejected Canadian Pacific's
advances, setting the stage for a potential proxy battle.
Union Pacific Corp (N:UNP) UNP.N chief executive Lance Fritz told
Reuters last week consolidation would harm the industry and the
No. 1 U.S. railroad has been lobbying lawmakers and regulators
against mergers.
Asked whether Union Pacific would participate in
consolidation of North America's seven remaining major
railroads, he said "we will act in the best interests of our
shareholders."
Matt Rose, chairman of No. 2 U.S. railroad BNSF, owned by
Berkshire Hathaway (N:BRKa) BRKa.N , said now is not the time for
mergers because "our customers do not want" them. But he added
mergers would not necessarily be a bad thing.
"There's nothing evil at all in having a transcontinental
railroad," Rose said on Thursday. "You've got lots of national
networks in lots of industries."
Rose said if a Canadian Pacific and Norfolk Southern deal
looks likely, BNSF will participate in further consolidation.
Rose stressed if Norfolk Southern goes under the hammer CSX
would be at a competitive disadvantage if the $1.8 billion in
annual cost savings Canadian Pacific promises from a deal were
borne out. This would lead to a "final redrawing" of the
continent's rail map.
"CSX would be at an enormous disadvantage and so there would
be another step towards consolidation," he said.
BNSF, Union Pacific and Canadian National Railway Co
CNR.TO would be seen as potential suitors for CSX.
A question is how the U.S. rail regulator would approach any
proposed merger, as it must take into account other potential
deals.
Some analysts see CSX's announcement Monday that it is
consolidating some operating divisions and closing
administrative offices as a proactive step toward remaining
competitive. CSX did not respond to a request for comment.
Independent rail analyst Anthony Hatch said CSX faces a
dilemma if Canadian Pacific gets its way. CSX might be able to
stand alone, but would lose value if it struggled.
"I don't think they could afford to take that
bet-the-company risk," Hatch said.
(Editing by Joe White and Andrew Hay)