October 17, 2014 / 4:48 PM / in 3 years

As clock winds down, CP Rail's Harrison hunts for his dream deal

TORONTO/CHICAGO, Oct 17 (Reuters) - Veteran railroad boss Hunter Harrison has won over many critics since taking over as chief executive of Canadian Pacific Railway, but he still has unfinished business - creation of a consolidated North American railway - and he is running out of time to do it.

That might explain why CP, Canada’s No. 2 railway with extensive operations in the United States, and the No. 3 U.S. railway, CSX Corp, have been talking about combining, even though such a deal would face tough regulatory barriers and alarm customers.

A source familiar with the situation said the two held exploratory talks this month and are contemplating whether to take them further. Both companies have declined to comment, but CSX Chief Executive Michael Ward said on Wednesday that more big U.S. rail mergers could hurt service.

Harrison, 69, the former CEO of Canadian National Railway , has touted the value of consolidation for years. He says creation of a new transcontinental railroad could improve congestion around Chicago, where east- and west-based railways meet and hand off cargo, a process that can take days.

“There is a point, and we are approaching that point right now in Chicago during winter, when you can’t handle all the business. Now what are we going to do in 10 years?” Harrison said at a CP investor event on Oct. 1.

“Do we wait to get in solid gridlock and then address it?”

Harrison has spent his career preaching the benefits of tightly scheduled systems at railways across North America, first at Illinois Central, then at CN, and now at CP. A deal with CSX would add scale to the dream.

The man who hosts “Hunter camps” to personally train workers has never been shy about making sure his script is followed. At CN, a screen installed in his office let him monitor every train in the network, and he was known for calling workers directly to ask why a train was not moving.

“I think it’s always been in the back of his mind, when he said mergers were good - it wasn’t just that mergers in general were good. It was that mergers and thereby extending his system was good,” said rails analyst Anthony Hatch.

Combining CP and CSX to create a transcontinental railway could inspire copycat deals among other Class I rails, transforming the U.S. system. The U.S. Surface Transportation Board, which must approve any deal, might balk.

Hatch said the time is wrong to propose a deal, given shippers’ frustration with railways, perhaps especially with CP, and he sees integrating CSX as complex and risky.

Rodney Kreunen, who was Wisconsin’s state railroad commissioner from 1996 to 2008, recalls a meeting a decade ago at which Harrison said that railroads must combine to be truly efficient: “I‘m not surprised that he would be interested in CSX,” Kreunen said.

When Harrison was at CN, but before he became CEO, its 1999/2000 bid to buy Burlington Northern Santa Fe was blocked by U.S. regulators.

Any new deal could kick off years of regulatory wrangling. And with a successor in the wings, Harrison, who has said he will likely not be around by 2018, must get moving.

FIVE DECADES ON THE RAILS

Harrison, who took his first railway job - greasing bearings on rail cars - more than 50 years ago, seemed to be finished his career in 2009 when he ended a six-year stint as CEO of CN.

But when billionaire investor William Ackman’s Pershing Square Capital Management prepared an activist campaign to re-energize CP in 2011, Ackman went looking for Harrison to be his champion. He found him raising show horses in Connecticut.

Harrison makes the trains run on time, moving more cargo with less equipment, and that makes his railways profitable. That was the pitch that convinced CP’s investors to vote in Pershing’s slate of directors, and that made Harrison boss of another Class I railway in 2012.

“If you can apply some of their (CP management‘s) precision scheduling railroad techniques to other rails, you’d have a much more efficient system,” Ackman said on Thursday. “I defer to Hunter ... but I think he believes that there are combinations that will need to happen.”

Morningstar analyst Keith Schoonmaker in Chicago said Harrison has “set a standard” for railroads in the United States. “Physically he’s not very big and there is nothing magical about his appearance. But when he starts speaking, you want to listen.”

CP’s operations have improved under Harrison, but the railway, like most of its rivals, has been plagued by problems in Chicago.

“Chicago is a cesspool of North American railroads. It’s a roach motel - anything can go in, nothing can leave,” said Trains Magazine’s Fred Frailey, who has covered the industry for three decades.

Much of the cargo has to switch railroads in the busy interchange, changing crews. Delays ripple out across the continent.

In a Reuters interview on Oct. 2, Harrison said CP has offered to buy, lease or at least operate the small switching lines that knit together North America’s major railways at Chicago.

“We think we’re pretty good at operating terminals, and we could do a better job.” (Additional reporting by Paritosh Bansal in New York; Editing by Amran Abocar; and Peter Galloway)

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