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FT. WORTH - 12/08/05 - The Burlington Northern Santa Fe Railway's healthy financial position is fuelling speculation in the trade media that it may be considering new merger opportunities to significantly increase both its service profile in the US, Mexico, and Canada.
 
Last week, several Canadian industry publications quoted an international rail consultant as saying that the rail carrier - one of the two major railroads serving California - may again attempt a merger with the Canadian National Railway, which operates the former Illinois Central, Grand Trunk Western, and Wisconsin Central railroads.

An article in a transportation law publication last month speculates that BNSF may also make a grab for the Kansas City Southern (KCS), which also controls the Tex-Mex and Mexico's TFM railroad.

Wall Street analysts report that the BNSF will have some $2 billion in "free cash" to spend over the next 26 months on increasing the dividend paid to investors, buying back its own stock - reducing available shares and lifting the stock price - or acquisitions.

BNSF is North America's second-largest railroad, behind Union Pacific, operating around 32,000 miles of railroad and collecting around $10 billion annually in freight revenue.

The UP - the other carrier serving California - operates a slightly larger track network than the BNSF, but earns around $12 billion in freight revenue annually. A BNSF combination with either the KCS or the CN could more than overtake the Union Pacific in terms of network coverage and revenue.

According to one railroad industry consultant, the Canadian National would be the BNSF's most logical partner.

In 2000, BNSF and CN voluntarily cancelled merger plans after US regulators imposed a fifteen-month freeze on railroad consolidations while new rules were written.

However, according to the Association of Transportation Law Professionals, the BNSF may have an interest in acquiring KCS, a combination considered by some analysts to be more likely than a renewal of the BNSF/CN consolidation.

KCS would be an attractive match because of its control of the Tex-Mex - which links Houston to the US-Mexico border crossing at Laredo - and its TFM subsidiary, a major Mexican railroad that controls virtually all tracks into and out of the Port of Lazaro Cardenas and is currently spending $12 million to improve its rail-monopoly access.

The Port of Lazaro Cardenas is 600 rail miles closer to Houston than the ports of Los Angeles and Long Beach; only 200 miles further from Chicago than Southern California; the closest Mexican port to the capital of Mexico City; and labor costs are reported to be 30% cheaper that at US ports.

Furthermore, Wal-Mart is reportedly working with ocean carrier Maersk to invest in additional port capacity at Lazaro Cardenas, while terminal operator Hutchison Wampoa already is in the process of increasing the port's capacity ten-fold.
 
Meanwhile, the Wall Street firm of UBS projects that the Lazaro Cardenas port expansion and increased Asian imports will boost TFM's rail-freight revenue associated with port traffic from $29 million to as much as $225 million by 2025.

UBS projects that the Port of Lazaro Cardenas will be handling around 2 million containers by 2025, compared to the current 9 million at the ports of Los Angeles and Long Beach and less than 2 million at the ports of Oakland and Seattle.

The US Surface Transportation Board has, with very few exceptions, approved most rail mergers presented to it, despite substantial opposition by shippers and rail labor.
 
During the past two decades, the UP gained approval to acquire the former Western Pacific, the Missouri Pacific, the Chicago & North Western, and the Southern Pacific.

BNSF is the combination of the former Burlington Northern and the Atchison, Topeka & Santa Fe. One of the few mergers rejected was the 1984 proposed merger of the Santa Fe with the Southern Pacific.

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