Dream team?

Though twice-burned rail shippers remain wary, Canadian National and Illinois Central say their proposed merger will create the strongest, most efficient rail carrier in the hemisphere.

By Staff -- Logistics Management, 4/1/1998

Executives of the Canadian National Railway Co. (CN) and Illinois Central Corp. (IC) wasted little time in selling what they see as the benefits of their friendly merger announced last month. Not only will the combination create the fifth-largest railroad in North America,

they say, but it also will create the strongest, most efficient, and most international rail carrier in the Western Hemisphere.

Although CN and IC executives are upbeat about the benefits of the merger, shippers are likely to be less enthusiastic about the plan. Their experience with mergers to date has been less than positive, to say the least, and they will scrutinize the deal to see how it will affect pricing, equipment availability, and service.

In February, CN and IC announced that the Canadian railroad would acquire its smaller neighbor in a deal worth about $3 billion. The consolidation would create a railroad with approximately $3.7 billion in annual revenues and 186,000 miles of track in the United States and Canada. Both railroads are financially strong. CN, which was privatized in 1995, reported annual revenues of $3 billion in 1997. IC, one of the most efficient U.S. railroads, reported 1997 revenues of $700 million.

CN's track runs primarily east-west, from Halifax to Vancouver. The Canadian carrier also owns some track in the U.S. Midwest through its subsidiary, the Grand Trunk Western Railway. IC, which has a north-south orientation, connects with CN in Chicago via adjacent intermodal yards. The U.S. railroad has direct service paralleling the Mississippi River to the ports of New Orleans and Mobile, Ala. That T-shaped configuration opens up many possibilities for growth, said Michael Sabia, CN's executive vice president and chief financial officer, in a speech at the Transporte Internacional conference in San Antonio last month.

Sabia noted that a high percentage of bulk commodities--such as forest products, automobiles, metals, and chemicals--that were moving from Canada into the United States were headed to destinations served by Illinois Central. The merger will allow IC, which will continue to operate separately from CN, to compete more effectively for Canadian-origin cargoes now moving on competing U.S. railroads.

An equally important consideration, Sabia said, was the opportunity to create a truly North American rail system. "Transborder business is growing faster than U.S. and Canadian domestic traffic. We are taking advantage of the gravitational pull of the largest market in North America, [which is] working to integrate the Canadian and now the Mexican economies," he said.

Merging with Illinois Central would provide CN with a doorway to Mexico, he continued. In addition to its direct access to the Gulf of Mexico, IC is about to launch a high-speed water service between Mobile and the Port of Coatzacoalcos on Mexico's Yucatán Peninsula. The U.S. railroad, moreover, will bid in July for Mexico's southeastern rail concession, which includes rail lines that connect with IC's ferry terminal. If Illinois Central and its Mexican partners win the bid, CN will be able to offer a single-source intermodal network stretching from Canada to Southern Mexico. (For more details on IC's expansion into Mexico, see "Border Lines" on Page 30.)

Shared expertise

But there's more to the CN-IC merger than geographical expansion and growing freight volumes. According to Donald H. Skelton, senior vice president of marketing and sales for Illinois Central, it's also about sharing each railroad's particular expertise. Ever since the two carriers worked together on developing CN's Gateway Intermodal Yard in Chicago, CN's executive management has been observing IC's efficient operating methods, Skelton said in a recent interview. "They started to question whether the things that IC was doing could benefit CN."

Although CN has made great strides since its privatization two years ago, the railroad still is attempting to improve efficiency. A merger with Illinois Central will bring the U.S. railroad's high level of customer service and its operational talent into the fold, Skelton said. In particular, CN will gain the leadership of IC's former president and CEO, E. Hunter Harrison, who will become CN's executive vice president and chief operating officer. Harrison is widely considered to be one of the industry's most effective operations managers. CN's Paul Tellier, whom Skelton terms "a good facilitator and an expert politician," will remain as president and CEO.

The merger has passed one important milestone already. On March 16, CN successfully completed its cash tender for more than 46 million Illinois Central shares. Those shares, plus those to be exchanged in an upcoming stock swap, will be held in a voting trust pending approval by the U.S. Surface Transportation Board. That approval is expected sometime in the first half of 1999. No Canadian government approvals will be required, according to Sabia.