(Adds details, reaction. In U.S. dollars, unless noted)
By Allan Dowd
VANCOUVER, British Columbia, Sept 26 Canadian National Railway Co (CNR.TO) agreed to buy most of Elgin, Joliet and Eastern Railway Co on Wednesday, a deal aimed at easing congestion plaguing CN's operations in Chicago.
Canada's largest railway said it will pay $300 million for the bulk of the railway now owned by United States Steel Corp (X.N), which will retain the operations of the EJ&E serving its Gary Works mill in Gary, Indiana.
CN Rail has been praised by analysts as one of North America's most efficient railways, but it has long acknowledged that Chicago is a weak point where congested switching operations between its main lines slows freight traffic to a crawl.
"With the congestion in Chicago we can get from Winnipeg (Manitoba) to Chicago faster than we get from north Chicago to south Chicago. So this can have a substantial impact on transit times," Chief Executive Hunter Harrison said.
The tracks of the 198-mile (317 km) EJ&E run around the outskirts of Chicago and connect with all of CN's major lines running into the city. CN plans to invest $100 million to upgrade sections of the EJ&E.
CN hopes the deal will close by mid-2008.
The takeover requires U.S. regulatory approval, but Harrison predicted minimal opposition from other major railways because it should free up track space on the region's small switching carriers as CN consolidates its traffic on the EJ&E.
Analysts generally praised the deal.
"Price is probably fair if synergies are realized," Morgan Stanley Research said in an analysts note.
CN said the deal will be financed with debt and cash on hand, and should boost diluted earnings per share slightly in the first year after U.S. regulatory approval. It expects operational savings of about $20 million in the long term.
Harrison, who was chief executive of Illinois Central when it was purchased by CN in 1999, said the deal may also allow the company to eventually sell some of its real estate in Chicago.
He said the deal should not lead to major layoffs and CN was committed to giving any dislocated workers other jobs within the company. The EJ&E employs about 700 people in Illinois and Indiana.
The deal comes three weeks after Canadian Pacific (CP.TO) announced it would buy the Dakota, Minnesota & Eastern Railroad for C$1.5 billion, a deal that also increases CP's access to Chicago.
Montreal-based Canadian National now operates about 20,300 route miles (32,700 km) in eight Canadian provinces and 16 U.S. states.
CN's shares were up 53 Canadian cents at C$56.47 at midday on Wednesday in Toronto.