CP Rail offers ‘sizable premium’ in Norfolk Southern takeover bid
Canadian Pacific Railway Ltd. is making clear that it’s determined to consolidate the rail industry, confirming Tuesday that it had made an offer of “a sizable premium” to take over U.S. rival Norfolk Southern Corp.
CP said the offer was a combination of cash and stock, but did not specify the value. NS did not immediately respond to a request for comment.
Hunter Harrison, CP’s chief executive, has been saying for years that mergers in the railway industry are inevitable, despite an unofficial regulatory moratorium on deals between major railroads.
“I still think it’s going to happen. It’s not a case of if; it’s when,” Harrison told the Financial Post last month, adding that current weakness in the industry could spur a deal.
Bloomberg News first reported last week that CP and NS were in early-stage takeover talks. Any deal would create an industry behemoth. CP’s 2014 revenue was $6.62 billion while NS’s was US$11.6 billion.
On Tuesday, CP outlined several reasons why a merger with NS would be good for both companies as well as the shipping customers they serve.
A deal “would create a transcontinental railroad with the scale and reach to deliver improved levels of service to customers and communities while enhancing competition and creating significant shareholder value,” the company said in a news release.
The combined company could grow its earnings faster than either CP or NS could on their own and would help alleviate congestion in Chicago — a major choke point for the North American rail system — by channelling traffic away from the city, CP added.
The U.S. Surface Transportation Board (STB) will have to approve any deal and it has in the past set a very high bar for mergers between the biggest “Class 1” railways, insisting that the deals must not diminish industry competition.
However, CP said it was confident it could satisfy regulators in both the U.S. and Canada by offering shippers the alternative of using another carrier if the new company “failed to provide adequate service or competitive rates.”
CP said it would also give shipping customers the choice of where to connect with another rail carrier along its network.
“In short, a combined CP/NS would create capacity for all shippers without creating the need for more infrastructure,” the company said.
There are only seven North American Class 1 railways — defined as those with 2013 operating revenue of at least US$467 million. In 2000, the STB imposed a 15-month moratorium on Class 1 mergers after Canadian National Railway Co. tried to combine with BNSF Railway Co., now owned by Warren Buffett’s Berkshire Hathaway Inc. No deals between the major rail firms have happened since then.
The “pro-competitive” hurdle put in place by the STB will make a deal difficult, but “not impossible,” said Scotiabank analyst Turan Quettawala.
Because NS’s network is very similar to that of CSX Corp. — another major railway that CP attempted a deal with last year — shipping customers will still have an option between competing lines, Quettawala said in a recent analysis.
“It seems that most shippers enjoy access from both CSX and NSC so there is choice, which should help to reduce the competitionrelated worries,” he wrote.
“If anything, a shipper is likely to benefit from an extended network that improves access to various markets and improves service.”