Report says Canadian Pacific is looking into takeover of Norfolk Southern

By Staff
November 09, 2015

While merger and acquisition activity (M&A) is not as prevalent in the freight railroad sector compared to other modes of freight transportation, a Bloomberg report published today suggests otherwise.

Bloomberg reported that Canadian Pacific Railway Ltd. is “exploring a takeover of U.S. carrier Norfolk Southern Corp. in a fresh attempt to consolidate the North American industry, according to people familiar with the matter.”

The report added that CP is currently raising financing and held early-stage merger talks with NS, who is currently valued at $24 billion. And it cited the report’s sources as saying these discussions are preliminary and talks may or may not progress or lead to a deal. CP and NS representatives did not offer up comment to Bloomberg.

This does not mark the first time CP has tried to make a large-scale North American railroad acquisition.

In October 2014, it was reported that CP approached CSX about a potential merger but talks stalled out. Save for the Berkshire Hathaway $26 billion acquisition of BNSF Railway in 2010, railroad M&A has been largely quiet on that front.

Had that deal eventually been consummated, the total market value of CP and CSX would be $62 billion, according to the WSJ.

This merger would have likely faced multiple obstacles if CP continued to pursue CSX, due to intervention from the U.S. Department of Transportation’s Surface Transportation Board (STB). This occurred in 2000, when a proposed merger between Burlington Northern and CP was halted due to resistance from the STB, according to the WSJ report. Other obstacles cited included national security concerns, given that national security officials would be expected to closely examine any proposed deal “under laws governing foreign ownership of infrastructure such as railroads that is deemed critical.”

The WSJ report said CP CEO E. Hunter Harrison recently stated at an investor conference that M&A in the railroad makes sense as it would help in aiding Chicago interchange congestion issues, which is the key rail connector between East and West Coast Ports.

And with the current balance of power in North America among the Class I railroads––two in the east, 2 in the west, one in the middle, and 2 in Canada––an industry stakeholder said in a previous interview that has created a very stable playing field, but were one of the legs of this “table” to be pulled, it would require some sort of response among the other members of the supporting cast, which he said is not likely in their best interests.

What’s more, the stakeholder said that deals like this tend to have limited value, coupled with a business case not strong enough to overcome other considerations.

And a separate industry observer said that a CP-NS deal would likely follow a path akin to the one the CP-CSX deal did, with even stiffer resistance, too.