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Rail cars loaded with Canadian wheat travel through the Rocky Mountains on the Canadian Pacific railway line near Banff, Alberta, October 6, 2011.© Todd Korol / Reuters

If nothing else, Keith Creel is courageous. It takes some audacity to argue North American railroads are ripe for mergers when major rivals have scoffed at the idea.

On Tuesday, Canadian Pacific Railway's chief operating officer told a Toronto transportation conference that when it comes to consolidation, "it's not if, it's when." His competitors have been arguing the opposite for months.

Ever since CP tried, but failed, to merge with CSX Corp. in 2014, consolidation has been a hot topic in the industry; railroad executives have been asked about it countless times at conferences over the past 13 months. Their answer is almost always the same: the regulatory burden is way too high. This very message was voiced as recently as last week, when word started to leak that CP was considering a $28-billion (U.S.) offer for Norfolk Southern Corp.

"We don't think it makes sense for the industry; we don't think it makes sense for our shareholders," Union Pacific Corp.'s chief financial officer Rob Knight said of industry consolidation on Nov. 11. The U.S. Surface Transportation Board's (STB) new merger rules require any deal to enhance competition, and that's a very hard threshold to meet because the regulator now weighs the potential for follow-on deals in its review. Mergers and acquisitions often come in waves, so the STB will consider whether one deal will lead to many.

"For anybody who is going to try to go at [consolidation], it will be a difficult regulatory environment to overcome," Canadian National Railway Ltd. chief financial officer Luc Jobin said in May, adding that the likelihood for multiple deals will weigh heavily on regulators' minds. "I think [the STB's] bias will be to only approve such mergers if it is clearly in the best interest of the shippers and clearly enhancing competition, so that sets the bar pretty high."

The regulatory burden is especially important, CSX has argued, because the obvious synergies that came from the last wave of railway consolidation don't exist to the same extent today. Last time there were many overlapping mergers, which meant railways operating in the same regions could strip out costs by consolidating some rail routes and by tackling issues such as support facilities.

Assuming the remaining eastern railways can't merge with each other for competitive reasons, and the same goes for western railways, "those synergies aren't there to the same degree," CSX executive vice-president Fredrik Eliasson said in September.

Adding complexity, he argued, is the lengthy regulatory review, which adds at least two years of uncertainty. And that process is likely to stamp out the few synergies that would come from fixing problems such as inefficiencies at gateways where railways hand off traffic to one another.

Mr. Eliasson believes any merging railways will have to amend their original deal so many times to appease all the affected stakeholders that any special value will eventually be stripped out. "It is hard for us to see that the economics really work," he said.

And then there's Norfolk Southern, which argued against consolidation before even being approached by CP. Building on CSX's argument, chief executive Jim Squires argued in May that "virtually anyone who can claim harm from the transaction has standing to seek some sort of condition associated with the merger, and frequently the railroads are required to oblige, whether they want to or not."

"The customers obviously are very active in merger proceedings, and as a condition of approval of a proposed merger, customers will naturally seek lower rates and improved access – and that could be very detrimental to the finances of the industry as well," he added.

"In today's political and regulatory environment, I think transcontinental mergers – further consolidation in the industry – would be a mistake. It would be fraught with risks, risks of open access, impositions, and other conditions that would detract from the economics of the industry today," Mr. Squires said.

Norfolk Southern is already starting to repeat some of these arguments now that CP has gone public with its offer. Because there's officially a merger offer on the table, it may seem as though the railway is simply being defensive to this one deal. But Norfolk Southern and its rivals have already been at it for months.

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