Canadian Pacific CEO Hunter Harrison Hunts for His Biggest M&A Deal
The man brought in to run Canada’s second-biggest railroad likes to say one of his missions is to “make the assets sweat” — in other words, really put them to work. He could say the same about his investment bankers.
A railroader for more than five decades, Hunter Harrison is an inveterate dealmaker who helped drive the industry’s initial consolidation wave in the 1990s. Now, his Canadian Pacific Railway is exploring a takeover of U.S. carrier Norfolk Southern Corp., people familiar with the matter told Bloomberg News last week.
A deal for Norfolk Southern, the second-biggest railroad in the eastern United States, would revive the 71-year-old CEO’s efforts to build a transcontinental carrier after talks with CSX Corp. ended last year. A merger would offer a sterner test than anything he’s ever done because of its sheer size and would mark the first major North American takeover since Warren Buffett’s purchase of Burlington Northern Santa Fe Corp. in 2010.
“The investment community would probably have more confidence in Hunter than anyone else in the industry to pull off something so large and complicated as this,” said Mark Levin, an analyst with BB&T Capital Markets in Richmond, Virginia. “He’s probably licking his chops at the opportunity to really create a very large, powerful and incredibly efficient railroad.”
Harrison has built a reputation as a no-nonsense operator focused on speed, efficiency and shareholder returns. After solidifying Canadian National Railway Co.’s status as the leanest North American railroad, Harrison was lured out of retirement in 2012 by shareholder activist Bill Ackman — and promptly turned Calgary, Alberta-based Canadian Pacific from the continent’s least efficient carrier into one of the best-performing.
Ackman’s Pershing Square Capital Management is the biggest stockholder. Canadian Pacific has surged almost 150% since the day before Harrison’s appointment, leaving it valued at C$27.9 billion as of Nov. 13. Norfolk Southern’s market value was $26.6 billion.
Harrison wasn’t available for an interview last week, and spokesman Jeremy Berry said Nov. 15 that Canadian Pacific wasn’t commenting on a Wall Street Journal report that the CEO offered potential merger scenarios to Norfolk Southern in a meeting with his counterpart, James Squires. The Norfolk Southern CEO was cool to the overture, the newspaper reported, citing an unidentified person familiar with the matter.
Harrison, a Tennessee native, began his career in 1963 as an 18-year-old carman-oiler for St. Louis-San Francisco Railway Co., lubricating train wheels while attending the University of Memphis.
Meshing Canadian and U.S. railroads is nothing new for him. In 1998, as CEO of Chicago-based Illinois Central Corp. he agreed to the takeover by Canadian National.
As Canadian National’s chief operating officer, he worked on the $1.2 billion acquisition of Wisconsin Central Transportation Corp. in 2001 and soon cut 12% of the workforce. As CEO, he spent $300 million to acquire most of the Elgin, Joliet & Eastern Railway Co. line in the Chicago area from U.S. Steel Corp. in 2009.
Both deals paid off for Canadian National, bolstering its U.S. sand cargoes and allowing it to bypass congested tracks in Chicago, a key bottleneck for freight trains.
Harrison more than tripled net income during his time as Canadian National CEO, using an approach known as precision railroading that involves running on fixed timetables to ensure reliable deliveries. At the time, the approach was a novelty in the North American industry.
When he left Canadian National at the end of 2009, the company’s operating ratio, a measure of efficiency that compares expenses with revenue, had been cut to 67.3 from 76 at the end of 2002, filings show.
Since joining Canadian Pacific, Harrison has used a similar recipe — shrinking the workforce, closing rail yards, running longer trains and using fewer locomotives — to bolster profit. At an investor conference in 2013, he jokingly compared his turnaround effort in Canada to General William T. Sherman’s march through Atlanta during the U.S. Civil War, which left the city in ruins.
“He has that hokey, ‘Tell it like it is’ Southern style, but he’s actually backed up the bravado with delivery,” said Gavin Graham, chief strategy officer at Toronto-based Integris Pension Management Corp.
Unions and regulators may not share his enthusiasm. The U.S. Surface Transportation Board long has been seen as opposed to more consolidation in an already slimmer North American industry. In 2000, the board balked at Canadian National’s proposed cross-border tie-up with Burlington Northern, and the companies dropped the idea.
The unions that represent Norfolk Southern employees might be wary of a CEO synonymous with cost-cutting. In his three years at Canadian Pacific, Harrison has lopped about 23% of the workforce, which stood at 13,700 at the end of September.
A combination with Norfolk Southern “is going to be brutal for headcount,” said Robert Mark, associate director of research at the MacDougall MacDougall & MacTier Inc. wealth-management firm. “Ultimately, there will be better and more sustainable jobs, but there are going to be lot of jobs removed at all levels of the operation.”
Time may be Harrison’s biggest enemy. He agreed last year to extend his contract until 2017, saying he would make way for Chief Operating Officer Keith Creel.
While Harrison’s health issues are now in the past — the CEO missed several weeks earlier this year to recover from a leg operation — Norfolk Southern may be his last big chance to conclude a marquee acquisition, said David Tyerman, a transportation analyst with Canaccord Genuity in Toronto.
“If he doesn’t do this deal now, he runs out of time,” Tyerman said. “It will be a huge feather in his cap if he can do it, but it’s going to take time to get it done.”
Harrison doesn’t seem to be bothered by that obstacle. In January, on a quarterly earnings call, he broached the topic of consolidation.
“We’re not obsessed with trying to create some merger,” he said. “But if there is a fit, if we’re in a position and there is opportunity there to enhance shareholder value, from our strategic plan, we’re certainly going to take a look at that.”
