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Canadian Pacific Seeks to Buy Short Lines as It Skips Big Deals

Canadian Pacific Railway Ltd. (CP) will consider buying regional railroads to improve efficiency because it doesn’t have the financial muscle now to acquire major carriers, Chief Executive Officer Hunter Harrison said.

“We certainly will become -- along the short-line, regional front -- more aggressive than we have been in the past,” Harrison said today at a Wolfe Trahan conference in New York. “There are a lot of those short lines today I’d like to control that I don’t. It’s not in our interest right now to focus on anything else.”

The CEO reiterated a prediction that major, or Class 1, railroads in North America will consolidate in the coming years. Antitrust issues “can be addressed and can be taken care of,” he said, adding that any such transaction would probably happen “post-Harrison.”

The 68-year-old Harrison plans to stay on as CEO for another three years before handing the reins to Chief Operating Officer Keith Creel.

Harrison also sought to dismiss speculation that Calgary-based Canadian Pacific, the country’s second-largest railroad, would be interested in buying Kansas City Southern. (KSU) Benoit Poirier, an analyst at Desjardins Capital Markets in Montreal, wrote in a May 14 note to clients that Canadian Pacific and its larger rival, Canadian National Railway Co. (CNR), are “well positioned” to buy Kansas City Southern.

Old Story

“I don’t necessarily agree with the report that came out of Canada last week that one of us thought about the KCS,” Harrison said, referring to Kansas City Southern. “That story is worn out. That story I’ve been hearing for 15 years.”

Canadian Pacific isn’t in a position to consider buying a larger competitor because it lacks the financial resources to do so, the CEO said. Canadian Pacific’s operating ratio, an industry gauge of efficiency that compares expenses to revenue, was 83.3 percent last year, exceeding the 71.7 percent average of North America’s largest carriers, according to data compiled by Bloomberg.

“It would be hard for us to put together the wherewithal to make an acquisition of a Class 1,” Harrison said. “That’s just probably not in the cards for some time.”

To contact the reporter on this story: Frederic Tomesco in Toronto at tomesco@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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