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CN may buy Illinois Central

On Thursday February 5th, 1998, Canadian National and Illinois Central confirmed that they were negotiating a merger. CN would pay US$30-40 for each IC share, three-quarters in cash, and the rest in CN shares. CN spokespeople stressed that a deal had not been cut.

Analysts disagreed on the sensibility of the deal. Some said it's a perfect match since their network complement each other. Also, both railways are efficient ICs operating ratio (the percentage of revenues that goes into operating the railway) was 62% last year, while CNs was 81,5%.

Others used the same facts to argue that no further efficiencies would be created. With no overlap or flab, the sum is not more than the parts. Besides, the companies have marketing agreements and CN runs its trains on IC.

"It's just an extension of their network and I'd be curious to see what they think they can generate in the way of additional business between the countries," said Burton Strauss at Dominick & Dominick to The Financial Post.

CN wants to expand its business in the US and buying IC would increase total revenues by a third to C$5.4 billion, making it the fifth largest North American railway (now the sixth largest). The new company would have 25,000 employees and 30,000 kilometres of track that would stretch from Vancouver to Halifax and down the Mississippi River to New Orleans. The deal would also give CN its own facilities in Chicago, the gateway to the USA. CN last year squabbled with other railways about high switching charges in Chicago.

Analysts said that the price CN was willing to pay for IC was high but not extravagant. Both companies' share prices shot up last week, and Internet newsgroups are rife with speculation about whether another company might make a competing bud for IC.