Business

Rolling SOUTH

CN's merger plans would make it part of North America's largest railroad

Anthony Wilson-Smith February 7 2000
Business

Rolling SOUTH

CN's merger plans would make it part of North America's largest railroad

Anthony Wilson-Smith February 7 2000

Rolling SOUTH

Business

Cover

CN's merger plans would make it part of North America's largest railroad

Anthony Wilson-Smith

It is a source of pride to Paul Tellier—and amusement to friends—that he is extremely well-organized. Ask about his determination to stay in good shape, and the president and CEO of Canadian National immediately responds that last year, he exercised on 330 days—an increase over his total of 322 days the year before. How many nights in 1999 did he spend in hotel rooms away from home? One hundred and thirty-five, almost evenly divided between Canada and the United States. Whether on the road or in his 16th-floor office adjacent to Central Station in Montreal, his days usually start at 7:30 a.m. and end 12 hours later. Tellier knows this because at the end of each year he consults his [)ay-Timer, and analyzes how he spent his six-day workweeks, and whether that was the best possible use. l'he importance he attaches to

Straddling borders

If Ottawa and Washington approve the deal, the newly created North American Railways Inc. will become the continent’s largest railroad. In all, it would have about

80.000 route kilometres of track. That includes nearly 27,000 km of CN track (shown in red) and BNSF’s nearly

54.000 km (in blue). The nearly 25,000 km of CPR track are shown in green.

Cover

The role that railroads have played in linking east to west would be far less important than the north-south services

time management, the 60-year-old Tellier says with a grin, “leads some friends to call me obsessive.”

Luckily for CN shareholders, Tellier’s drive is matched by results. Since his appointment in 1992 by then-Prime Minister Brian Mulroney, Tellier has cut CNs total of 33,000 frill-time employees by a third, steered the once money-losing Crown corporation through a successful privatization in 1995, embarked on an unprecedented expansion program, and turned the company into a moneymaker that is a darling of investors in the transport industry. Last week, CN reported record profits in 1999 of $751 million, up from $266 million the previous year. (Part of the reason was CNs $3.6-billion takeover, formalized last year, of Illinois Central Corp., creating the continent’s first binational railroad.) “When I appointed Paul, I thought that if anyone could fix CN, it’s him,” Mulroney told Macleans last week. “But I can’t say I foresaw the extent to which he would.”

Nor could just about anyone else, including American and Canadian government regulators. That is one reason why the outcome of Tellier’s biggest move yet will not be clear for another 12 to 18 months. In December, CN and Fort Worth, Tex.-based Burlington Northern Santa Fe Corp. (BNSF) announced plans for a merger, with the aim of forming North

America’s largest railroad. The deal, if approved by Ottawa and Washington, would create a company with about 80,000 route kilometres of track, 67,000 employees, services extending from Prince Rupert, B.C., to the north, to the Gulf of Mexico to the south, and revenues of $18.5 billion. North American Railways Inc., the new entity, would be headquartered in Montreal, with Tellier as CEO, while Robert Krebs, BNSF’s soon-to-retire CEO, would be chairman. The new company would serve as the parent company for BNSF and as a companion company for CN. It would be subject to the same federal rules that now bind CN, meaning single shareholders could own no more than 15 per cent of the company, and it would operate in both official languages.

If that sounds too good to be true for nationalists, it is because there could also be significant downsides for them, and others. Americans would own 80 per cent of the new company, and the link that railroads have traditionally played in joining Canada east to west would rank far behind in importance to the new railroad’s north-south services. Critics, including western MPs, fear CN will neglect or abandon cross-Canada rail lines to pay more attention to lucrative routes leading south. There are also fears that over time, the larger BNSF would erode the company’s Canadian component. “It looks good now,” said a skeptical senior Liberal. “But what happens when Tellier retires, the Americans say it’s their turn to name a CEO, and want the head office in a more convenient place?” For his part, Transport Minister David Collenette is not yet ready to judge. “I have always supported Mr. Tellier’s efforts to make CN a North American powerhouse,” says Collenette. “But this is a different arrangement from what he has done in the past, and deciding on the ramifications is going to be a long process.”

Tellier will not discuss what will happen if the merger is

rejected, because, he says, “I do not foresee that happening.” But, he adds, “am I surprised there are questions? No. Will we answer them all? Yes.” Complaints don’t stop this side of the border. The United States federal Surface Transportation Board, which must approve the merger, said last week it will begin public hearings on March 8 to study, for the first time ever, the specific question of whether such a merger would make other mega-mergers inevitable. Unions are concerned about losing jobs. Investors are leery about the long wait for approval—CN’s stock has fallen about 20 per cent since the merger announcement, to about $35. Tellier acknowledges “it is quite possible” no ruling will come before mid-2001. The problem, says one analyst, is “with that much delay, this deal could unravel in a hundred different ways.”

To those objections, Tellier provides carefully moderated responses. On the issue of nationalism, Tellier says Canada depends on increased trade with the United States and

CN

>Headquarters: Montreal

>Canadian and

U.S. employees: 23,500

Track in Canada and the United States: 26,800 km

V 1999 revenues: $5.2 billion >Trains per day: 265 >* Freight cars: 66,000

> CEO: Paul Tellier

1998 salary: $775,000, $775,000 bonus, plus stock options

Source: CN

BNSF

>Headquarters: Fort Worth, Tex.

>Canadian and

U.S. employees: 43,000

>Track in Canada and the United States: 53,600 km

>► 1999 revenues: $13.5 billion

>Trains per day: 1,300 >Rail cars: 98,000

>■ CEO: Robert Krebs

1998 salary: $786,043, $845,601 in bonuses, plus stock options

Source: BNSF

Mexico. “And in a global economy,” he adds, “it’s the biggest and strongest that survive, so we are ensuring we are among those.” In the 1980s, he observes, there were more than 60 so-called Class 1 railroads in North America. Now, after a series of mergers, there are only seven, and two are Canadian: CN and Canadian Pacific Railway Co. (page 35). It does not bother him that CN, a longtime symbol of Canadian can-do, is already 60 per cent American-owned. “We should be proud,” says Tellier, “that people who could buy Microsoft or Coke stock or anything else chose this company.” Such talk would once have been anathema to Tellier. Until his move to CN, he was a career public servant. Born in the rural municipality of Joliette, Que., Tellier studied law at the University of Ottawa and did further studies at Oxford University. He joined the federal civil service shortly after, and quickly rose to a series of senior positions. He gained renown as point man for Pierre Trudeau’s government before and during the 1980 Quebec referendum campaign, helping organize and implement strategy. He also helped co-ordinate legislation aimed at protecting Canadian culture and business from foreign encroachment. Those measures, and the ties he developed with people such as Jean Chrétien, led many people to regard Tellier as a Liberal sympathizer. But when Mulroney’s Progressive Conservatives came to power in September, 1984, he named Tellier clerk of the Privy Council—the most senior civil service position. Mulroney, who first met Tellier during the 1980 referendum campaign, said the choice was clear: “I understood Paul always did his best on behalf of the government, regardless of party. And it was obvious that his abilities were extraordinary.”

Intensely focused, Tellier is still remembered for the time in 1991 he lost his temper in public and told then-Liberal MP John Nunziata to “shut up” after repeated goading during parliamentary hearings. The public outburst was uncharacteristic, but the blunt talk was not. “In private,” says Mulroney, “Paul was always frank, never afraid to express a contrary view, and I liked that.”

Tellier played a crucial role in Tory initiatives ft ranging from the failed Meech Lake constitu“ tional accord to free-trade negotiations with the I United States and Mexico, to implementation of the Goods and Services Tax. He enhanced his

‘In the late 1980s, it became clear that Canada was moving to much closer ties to the U.S.’

reputation as a tough, smart strategic thinker who stayed cool under fire. Even in the most tension-filled moments in meetings at 24 Sussex Drive with the prime minister, says Norman Spector, a former chief of staff to Mulroney, “Paul would have a good word for one of the kids who came in unannounced, or a pat on the head for Clover [the Mulroneys’ black standard poodle].” But by the late 1980s, Tellier—who says “I never saw myself as a career civil servant”—was restless. When he received an offer to become CEO of a Montreal-based company in early 1989, he was ready to accept, but Mulroney dissuaded him. “He said there would be something better later,” Tellier recalls. When Mulroney offered the CN job, he jumped at it—even as political opponents described the appointment as pork-barrel patronage. Tellier stayed silent: Mulroney did not. “I told them,” recalls Mulroney, “to all go fly a kite.”

In 1992, the year that Tellier joined CN, it lost $1 billion. Among other things, a consultants study concluded it should cut 10,000 jobs to reduce its “topheavy, obsolete, badly focused and excessively layered management structure.” Starting almost immediately, Tellier hacked our six management layers, and sold or abandoned more than 9,600 km of unprofitable track. Tellier says his approach was to ask: “What are we doing wrong, and how can we do it differently?” Too often, he says, “I heard 17 different reasons why things could not be changed—and the people who gave such answers went out the door.”

Three years into the job, Tellier tookCN public in 1995. Buoyed by a $900-million equity infusion from the federal government, it was the richest privatization in Canadian history: investors bought 84 million shares at $27 each, bringing $2.2 billion to the government. By then, Tellier had earned a reputation for cutting costs through innovative steps. These included allowing workers to assemble trains by new remote-control technology and consolidating maintenance and accounting facilities, while simultaneously renewing emphasis on customer service.

One question that puzzles even friends ofTellier is where he, as a newcomer to the private sector in general and railways in

A A

CPR

Headquarters: Calgary Canadian and U.S. employees: 19,500

>Track in Canada and the United States: 24,800 km

)► 1999 revenues: $3.5 billion

V Trains per day: N/A

>> Rail cars: 54,000

>Canadian Pacific Ltd. CEO: David O’Brien 1998 salary: $990,000, $495,000 bonus, plus stock options

particular, came up with his strategic vision for CN. Tellier says the answer is not complex: “In the late 1980s, it became clear that Canada was moving to much closer ties to the United States, and a more outward vision. Any successful business would have to follow those steps.” Stanley Hartt, another former Mulroney chief of staff, scoffs at the idea that Telliers public service background made him a neophyte at plotting strategy. “People say the clerk of the Privy Council is solely guided by the wishes of the prime minister,” says Hartt. “But Paul was a master, especially in the rookie days of government, at ensuring his favourite items were high on the agenda.” Hartt, who in his present role as chairman of the investment banking firm Salomon Smith Barney Canada Inc. advised CN on the BNSF transaction, adds: “Pauls experience dealing with huge numbers and complex issues shows very much to his advantage.” Tellier revels in his present life. “I often regret,” he says, “that I didn’t do this 10 or 15 years ago. In the private sector, the results are far more tangible: every Tuesday, I get pages of hard numbers dealing with things like revenues and safety records, and I measure directly how were doing.”

Unlike Ottawa, where civil servants are continually on call, Tellier now has more direct control of his time. He and his wife of 40 years, Andrée, often use CNs centre-ice season tickets in the reds for Montreal Canadiens games at the Molson Centre. On weekends, they alternate between their Westmount home and a cottage north of the city—travelling by Jeep in winter. In warmer weather, Tellier rides his BMW 1,000-cc motorcycle. The couple have two children—daughter Claude, age 39, a criminologist, and son Marc, 31, an executive in BCE’s Internet division—and three grandchildren.

These days, Telliers efforts are devoted to the host of issues—regulatory and otherwise—arising from the merger. They include making the case for the plan in Washington in a presidential election year, when everything moves more slowly; and fending off criticisms that the mega-merger would create a company so big as to be unmanageable. Those challenges, he insists, are “energizing: I regard more work as a source of satisfaction.” As he moves towards 65, the traditional stepping-down age, Tellier says: “I would rather die than retire.” And as CN barrels down its ever-increasing expanse of track, Tellier is determined to remain as he is—the man who would be king of a North American railroad colossus. G3