Railroad Games: Thoughts on the Canadian Pacific proposal to acquire Norfolk Southern Corporation.

Thoughts on the Canadian Pacific proposal to acquire Norfolk Southern Corporation. 

Don't let Hunter Harrison's bluster and William Ackman's Pershing Square Capital Management Group fool you here.  I believe that the CP needs another railroad as a partner, for it to remain as a viable railroad.  There are  sections of CP Rail that are critical (by linking the East - Mississauga/Toronto to Duluth/Superior) which generate little to no traffic, similar to the D&H between Montreal and Albany, NY.  These sections take money away from the profitable sections to keep them maintained.  I believe that Hunter Harrison understands this.  CSX was Hunter's first choice, because it was an easier target.  This might be a way of applying pressure on CSX to come back to the table. Without Bill Ackman (and his source of funding), Hunter Harrison is a poor man with his hat in his hand, begging for somebody, anybody to merge with him. 

Ackman is as brash and bold as Hunter Harrison, but has his own problems:  http://www.nytimes.com/2015/11/10/business/dealbook/ackman-defends-pershings-valeant-losses-and-digs-at-snide-coverage.html?ribbon-ad-idx=5&rref=business/dealbook&module=Ribbon&version=context&region=Header&action=click&contentCollection=DealBook&pgtype=article  Consider Ackman's raid on CP Rail that eventually installed Harrison as CEO.  He makes lots of enemies by forcing corporations (and the people who operate them) to bend to his will.  Currently his enemies are gloating that the "Golden Haired Boy that could do no wrong" is "taking it on the chin."  His enemies seem to be trying to "put the squeeze on him," per the article above.  So the big question is "How deep are Ackman's pockets?"

If CSX could fend off Harrison and Ackman about 1 year ago (and remember that CSX had it's Board of Directors raided by the Children's Fund about 10 years ago), couldn't an arguably better managed Norfolk Southern do the same?  In articles dated last year, when CP Rail started after CSX and was rebuffed, they also mentioned KCS as a 3rd choice behind NS (this is my reasoning for Harrison begging for anyone to merge with CP Rail).  Finally, maybe James Squires sees something that he wants in CP Rail (Prince Rupert and Vancouver are the closest North American ports to Busan Korea.  CP Rail has the line to Vancouver and Korean imports are increasing).    Now consider which Railroads have access to which Port Terminals to ship their freight across the ocean.  Just for giggles, let's compare CP Rail to NS to CSX and we'll add in FEC as a feeder to both railroads.  Note:  Gennessee & Wyoming runs the Savannah Port Railway  and the Golden Isles Terminal Wharf in Savannah, The Golden Isles Terminal Railway in Brunswick, the Port St. Joe Route and the Commonwealth Railway - the old Norfolk, Franklin and Danville - where the A.P. Moeller Maersk container terminal in Portsmouth).  I've listed the smaller port terminals in blue.

• CP Rail Port Terminals
  

1. Vancouver, BC
2. Montreal, QC
   

• NS Corporation Port Terminals
  

1. Mobile, AL
2. Jacksonville, FL
3. Savannah, GA
4. Charleston, SC
5. Morehead City, NC
6. Norfolk/New Port News, VA
7. Wilmington. DE
8. Philadelphia, PA
9. New York/NJ
10. Boston, MA (by partner Pan AM and joint venture Pan Am Southern, although using only single stacked deep well cars until they past the Hoosic Tunnel)
11. New Orleans, LA
    

• CSX Port Terminals
  

1. New Orleans, LA
2. Mobile, AL
3. Pensacola, FL
4. Port St. Joe, FL
5. Panama City, FL
6. Tampa/St. Petersburg, FL
7. Miami, FL
8. Jacksonville, FL
9. Brunswick, Ga
10. Savannah, GA
11. Charleston, SC
12. Wilmington, NC
13. Baltimore, MD
14. Wilmington, DE
15. New York/NJ 
16. New London, CT
17. Bridgeport, CT
18. New Haven, CT
19. Providence, RI
20. Boston, MA
    

• FEC Railway (Considered as a feeder to both CSX and NS)
  

1. Miami, FL
2. Port Everglades, FL
3. Port Canaveral, FL

Based on the list above (and I know that it is not unabridged), if you were CP Rail and looking for a suitor, which railroad is going to be your first choice to partner with? CSX has more port terminals from which to ship Intermodal Containers, but NS covers all of the Major Ports.

It used to be that it was cheaper for the container ships to dock at Prince Rupert (CN), Vancouver (CP Rail), Sea-Tac, Portland (BNSF and UP), Oakland/San Francisco (UP), LA/Long Beach (BNSF and UP) and Larazo-Cardonas (KCS) and solid blocks of containers would ship transcontinental via one of the Western Railroads and Connect with an Eastern Railroad to complete the delivery.  Yes, some container ships could dock on the east coast, but not a lot.  That number has steadily and consistently grown, but because the ships were smaller than the new large PanaMax sized ships, it was more costly to ship containers to the East Coast.  But with the new, larger PanaMax class ship, more containers can be carried and it will cost less per container to ship it to the East Coast.  I'm willing to bet that the cost of shipping a container to Miami by ship and back toward Dallas by rail (FEC-NS-Meridian Speedway-KCS) or (CSX-KCS) or even (CSX-UP) is cheaper than shipping the container to Long Beach and then to Dallas over the Sunset Route (UP-TP-MP) or the Santa Fe Transcon, just because of the fuel costs and their crossing of multiple mountain ranges.  So I'm betting that the Container ships will come east (I'd guess that Wick Moorman was thinking this way as well).

Now, to ship containers in Plus PanaMax and Super Post PanaMax container ships, we need to find ports that are deep enough to allow a ship with a 50' draft to dock  (This link shows a lot of data, including that Savannah might be able to support a New Plus Panamax ship:  http://www.cre.org/memberdata/pdfs/north_american_port_analysis.pdf).  
however, I read something the other day, about the Corps of Engineers having ruled out Savannah,  as not being able to be dredged any deeper than 47' without getting into the fresh water table.  This keeps Savannah from getting the largest new Super Post PanaMax ships to their port.  Yet look on page 5 of the referenced documents, at figure 7, "Top 20 North American Container Ports,"  to see that Savannah is the 4th largest port in the US for import/export of intermodal containers,behind LA, Long Beach and New York/NJ, but ahead of Vancouver, Oakland, Seattle, Houston, Norfolk, Manzanillo, MX, Tacoma, Montreal QC, Charleston, Jacksonville, Miami, Baltimore, Prince Rupert BC, Portland, Mobile and Tampa.  From the Trains Magazine article, Miami has a 50' deep channel AND it's the closest US mainland port to the Panama Canal.  I'm betting that Natural Ports (Miami, Tampa, Charleston, New York City, Boston, Mobile and Houston) will have an advantage over ports that are somewhat inland and on rivers (Savannah, Brunswick, GA, Wilmington, NC, Philadelphia, and even New Orleans and Port Arthur, TX), as rivers can only be dredged so deep before hitting the fresh water table.

Now, consider the major markets in the US.  They are referred to as MSAs (Metropolitan Statistical Areas) in the port analysis.  Outside of the ports, here are the major hubs within each state are listed in this document:  http://www.census.gov/population/estimates/metro-city/99mfips.txt  and http://clinton4.nara.gov/media/pdf/95-04att-3.pdf.  

When you are delivering materials for consumption to these places, the choice is truck or rail.  Now pick the rail lines that run from the ports to these places.  NS has stated that it can make revenue with runs as short as Savannah to Atlanta.

My big question is what does CP have to offer to CSX (1st choice), NS (second choice) or even KCS (last resort)?  CP needs an Eastern partner:  West Coast giants BNSF and Union Pacific don't need CP.  Neither does CN.  So the Bottom Line of my argument is that Hunter Harrison and Bill Ackman both need to find a suitor for CP Rail and fast.  Otherwise, it becomes a spinster with nothing attractive to offer to either CSX or Norfolk Southern and only a second rate choice to KCS who could just as easily go to CN-IC.  And in the process, Ackman and Pershing Square Capital Management lose a ton of money.

But, make no mistake about this:  Once the "Merger Game" restarts, it must play itself out.  IF, NS and CP Rail were to merge, I fully expect that UP will go after CSX.   NS Doesn't need a Transcontinental foot print to be effective or make money. I believe that NS, with its joint venture companies Meridian Speedway and Pan Am Southern have the ability to stand alone if need be.  But they would be even better off to buy the KCS and let UP lease the Mexican lines.  If the NS would make an joint venture company with Fortress Group's FEC (or buy it out right), they would not need to merge with anyone and end up doing quite well.  

As a final thought however, Remember Trains Magazine's Fred Frailey's warning: Warren Buffet's Berkshire-Hathaway Company has plenty of cash and could easily pay cash for NS (or CSX) and still have plenty of money left over.