(Bloomberg News circulated the following story by Hugo Miller on November 27.)
TORONTO — The biggest U.S. railroads including Union Pacific Corp. and Burlington Northern Santa Fe Corp. will face investor pressure to merge as they struggle to add capacity, Canadian National Railway Co.’s chief executive officer said.
“There’s going to be a large transaction in the next five to six years,” CEO Hunter Harrison, 63, said yesterday in an interview at his Montreal office. He said his railroad, Canada’s largest, won’t be involved in any big acquisitions before he retires in 2009.
A combination between two of the four remaining major U.S. railroads would create a single transcontinental carrier or allow one railroad to dominate freight in either the western or eastern U.S. It would also require approval from regulators, whose resistance helped sink a Burlington Northern-Canadian National merger in 2000.
North America’s railroads are attracting investors, including billionaire Warren Buffett, as rising prices for potash and coal drive freight demand. The surging cost of diesel fuel also gives railroads an advantage over trucking companies.
CN Rail, which generates more than half of its revenue from shipments to or within the U.S., is currently seeking U.S. approval for its $300 million purchase of Chicago-based Elgin Joliet & Eastern Railway Co. to ease traffic congestion around the city.
Canadian National fell 37 cents yesterday to C$45.84 on the Toronto Stock Exchange. The shares dropped 8.5 percent this year before today.
Hitting Bottom
Demand for lumber and forestry products, which has been hit hard by the worst U.S. housing slump in at least 16 years, has “already hit the bottom,” Harrison said. “We’re starting to see some increases, some strengths on a relative basis.”
Revenue from shipments of lumber and construction materials, which account for about 22 percent of CN Rail’s annual sales, fell 13 percent in the third quarter.
“Housing starts are going to come back”, Harrison said, without saying when. He said he doesn’t disagree with forecasts that say a rebound may not occur before early 2009.
The surging Canadian dollar, which has gained 18 percent against its U.S. counterpart this year, hurts the company by rendering U.S. revenue less valuable.
Harrison said he expects the U.S. dollar will strengthen and the Canadian currency weaken “some,” without giving a time frame. An eventual decline in the price of diesel fuel will bring some balance to the U.S-Canadian dollar exchange rate, he said.
Harrison said he plans to step down as CEO at the end of 2009, when he turns 65. By then, he will have spent more than 45 years in the industry after starting as a carman-oiler on the (San Francisco to St. Louis) Frisco railroad in 1963. He led Chicago-based Illinois Central Corp. until 1998.
Canadian National plans to name a chief operating officer by mid-2009 who would be Harrison’s likely successor. There is a “high probability” that the pick will come from within the company, Harrison said.