BNSF, CN propose $19 billion merger

MONTREAL -- On December 20, 1999, Burlington Northern Santa Fe and Canadian National confirmed rumors that had been circulating for several weeks and announced they would merge into a $19 billion holding company to create North America's largest railroad. The new company, to be called North American Railways Inc., will be based in Montreal and will boast almost 50,000 miles of track, stretching from Halifax on the Atlantic coast to Vancouver on the Pacific and southward to New Orleans and Los Angeles.

The Brotherhood of Locomotive Engineers vowed to protect the interests of all railroad operating employees as it monitors the proposed merger.

"Railroad companies always say there will be no job losses in mega-mergers of this type, but history has taught us otherwise," said BLE International President Edward Dubroski. "While we have yet to do so at this early stage, we look forward to meeting with leaders of BNSF and CN to protect the rights and jobs of our members."

The combination of Montreal-based Canadian National, Canada's biggest railway, and Fort Worth, Texas-based BN, the number two U.S. railroad, comes just six months after CN closed its 1998 acquisition of Illinois Central Corp. in a $3 billion transaction.

Under the terms of the deal, CN shareholders will receive 1.05 CN voting shares for each CN common share and the choice of either 1.05 North American Railways common stock or 1.05 CN shares exchangeable for the equivalent of North American Railways. The CN voting share will trade together with the exchangeable share as one security. To implement the transaction in a tax-efficient manner, North American Railways, Inc. will be created as the parent company for BNSF and as the companion company for CN.

Burlington Northern shareholders will receive one North American Railways common share and one CN voting share which will trade as one issue.

The resulting 50,000-mile system, blanketing the U.S. West and stretching from Vancouver to Halifax in Canada, will have 67,000 employees and annual revenue of $12.5 billion.

It was recently revealed that BNSF has agreed to pay CN $300 million if the deal goes sour. Canadian National would have to pay BNSF $150 million in those same circumstances.

Through their trade associations, shippers questioned the wisdom of the merger coming at this time.

Linda Morgan, chairman of the STB, appeared to have been caught off guard by the latest move to consolidate the railroad industry.

"I am surprised by the timing of this proposal," she said. "Railroads, together with their customers and employees, have not yet fully adjusted to recent mergers, and this proposal may represent the beginning of another round of major rail mergers. The Board will have to review carefully all of the ramifications of any such application that may be filed," Morgan said.

Jolene Molitoris, Administrator of the Federal Railroad Administration, said safety will be a key issue in approval of the merger.

"The U.S. Department of Transportation is concerned with all aspects of rail mergers, from the impact on competition to the effects on labor, communities and the environment," Molitoris said. "We will be an active participant in the proceeding before the Surface Transportation Board, and will consult closely with all stakeholders as we develop our position on this merger as we have in the past. First and foremost, however, our primary responsibility is to ensure the safety of any newly-merged system."

The other four major railroads not involved in the merger placed ads in newspapers directed at rail-users voicing their opposition to the merger. The campaign seeks to delay the deal rather than kill it outright, the Journal of Commerce reported.

Union Pacific, Canadian Pacific Railway, Norfolk Southern and CSX fired the first salvo in the campaign with these ads. Sources said the idea for the ads originated at Union Pacific.

Analysts have said that U.S. regulatory approval by the Surface Transportation Board and support from shippers and labor unions are the biggest hurdles facing CN and BN in their merger. The merger must be approved by the STB and stockholders of each corporation.

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2000 Brotherhood of Locomotive Engineers