CP CEO Says Buffett Won't Fight Norfolk Merger in Washington

  • Hunter Harrison expects Norfolk to reply `soon' on proposal
  • BNSF to participate if proposal moves forward, chairman says

Hunter Harrison, the chief executive officer of Canadian Pacific Railway Ltd., said he doesn’t expect that his $28 billion proposal to acquire Norfolk Southern Corp. will spur substantial opposition from Warren Buffett.

BNSF Railway Co., which is owned by Buffett’s Berkshire Hathaway Inc. and is the largest North American railroad by carload volume, and Union Pacific Corp. shouldn’t be worried about the merger because those carriers operate in the western U.S. while Norfolk is in the east, Harrison said.

“I just can’t imagine Mr. Buffett going to Washington and saying ‘Help me with these Canadians coming down in here and doing all these ugly things to us,’” Harrison said Wednesday. “I just don’t see him in that role.” He made his comments at a Credit Suisse Group AG conference.

“A new transcontinental merger could have the ultimate effect of restructuring the industry and BNSF will participate in the process if the proposal receives official consideration,” Matt Rose, BNSF’s executive chairman, said by e-mail. A spokesman declined to elaborate.

Harrison met with Norfolk management last month to present an unsolicited offer for a merger, which the U.S. railroad called “low-premium, nonbinding and highly conditional.” He said Wednesday that he expects to receive an official response from Norfolk “soon.”

Shipper Response

The proposal has received “encouraging feedback” from shippers but is seen negatively by other railroads, Harrison said.

“I think we’re very pleased where we are,” he said. “I think we’ve fine-tuned a little bit our plans, our thoughts, given some of the feedback.”

The merger would increase efficiency by reducing the need to exchange cars between Canadian Pacific and Norfolk Southern in congested hubs such as Chicago, Harrison said. The combined railroad would be able to wring out cost savings and improve service, he said.

“I don’t know who needs Kleenex to cry,” Harrison said of other railroads who may oppose the deal. “You’ve got competition and this is what this is all about.”

Challenging Environment

BNSF Chief Financial Officer Julie Piggott said Nov. 10 that “the regulatory environment is still challenging” for a merger of two large railroads. A day later, Union Pacific CFO Rob Knight said, “We don’t think it makes sense for the industry.”

BNSF could bring considerable resources to bear in consolidation. Berkshire had more than $66 billion in cash at the end of the third quarter. While Buffett has said he likes to keep a large cushion to cover potential losses at insurance units, the company’s dozens of operating businesses still generate more than $1 billion in profit a month.

The industry consolidated rapidly after the 1980 Staggers Act deregulated railroads in the U.S., but large deals stopped after regulators blocked a tie-up between BNSF and Canadian National in 2000. Under new merger rules that haven’t been tested, the Surface Transportation Board would require assurances that a merger wouldn’t hurt service and competition.

Norfolk Southern shares fell 2.8 percent following Harrison’s remarks to $92.15 at the close Wednesday in New York. They are up 4.4 percent since Nov. 16, the day before Canadian Pacific said it had proposed a takeover. Canadian Pacific fell 3 percent to C$190.97.

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