CP Rail ramps up pressure on Norfolk with public takeover strategy

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BNN.ca, November 18, 2015, Website



CP Rail ramps up pressure on Norfolk with public takeover strategy



Canadian Pacific Railway is offering to buy Norfolk Southern, to create North America's largest railway company. CP says the offer is a 23-percent premium over Norfolk's Friday closing price.



CP released its full takeover letter to Norfolk Wednesday morning, revealing the details of the advance. After markets closed on Tuesday, CP confirmed media reports that it was pursuing Norfolk, but at the time didn't disclose any details about the offer.



The Canadian railway says after the takeover Norfolk investors would own 41 percent of the combined company and the merged railway would be listed on the Toronto Stock Exchange, as well as the New York Stock Exchange. CP also says it sees potential for more than US$1.8 billion in annual savings.



Norfolk Southern said in a statement later on Tuesday evening that CP's offer worked out to less than a 10-percent premium to Tuesday's closing price of US$87.00 on the New York Stock Exchange.



Norfolk labelled CP's approach as a "low-premium, non-binding, highly conditional indication of interest." The company said its board will review what CP tabled, but warned of "significant regulatory hurdles" facing any proposed M&A among top railways.



The news ends nearly a week of speculation that CP would make a play for Norfolk. The merger would create the continent's largest rail network, with more than 56,000 kilometres of track. It would also give CP much needed access to the east and west coasts as well as the Gulf of Mexico.



"CP strongly believes that the combined railroad would offer unparalleled customer service and competitive rates that will support the success of the shippers and industries it serves, and satisfy the U.S. Surface Transportation Board and Canadian regulators," CP said in a release on Wednesday.



The merger would also alleviate congestion in Chicago, which is notoriously plagued by bottlenecks, by using underutilized hubs that would free up capacity for other railways operating through the city, CP says.



The deal appeals to shareholders for the cost-savings potential, Raymond James analyst Steve Hansen told BNN. CP's operating ratio – a widely watched measure of railway efficiency – is substantially lower than Norfolk's.



Norfolk's current ratio is about 70 percent, while CP's is about 65.7 percent, according to the companies' more recent quarterly reports. A lower operating ratio is better.



"The real eye of the prize is the cost take out opportunity here," says Hansen.



Analysts say the potential CP-Norfolk combination would create a strong transportation giant, but many are skeptical regulators would allow the combination.



CP's offer has been put together with this in mind, says Hansen. "CP is clearly attuned to the fact there are regulatory concerns around a deal like this but the broader bid has been structured to appease those concerns."



The potential merger faces hurdles, but don't underestimate Hunter Harrison – CP's highly regarded CEO, says Hansen.



"He is the one industry champion that has the ability to get something like this done."