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Canadian Pacific Drops Efforts to Merge With Norfolk Southern

April 11, 2016

By Jacquie McNish and Laura Stevens – The Wall Street Journal

CP says it sees ‘no clear path to a friendly merger’

Canadian Pacific Railway Ltd. abandoned its nearly $30 billion pursuit of Norfolk Southern Corp. on Monday after it was unable to overcome a wall of opposition from rival railroads, shippers and U.S. politicians warning the merger would diminish competition.

Canadian Pacific also has no plans to initiate merger talks with other competitors, Chief Executive Hunter Harrison said in an interview.

Harrison-Hunter

“I doubt very much we will be reaching out to anyone else. We fought the good fight; we tried to educate the public. But the political and economic environment was against us,” he said.

He said the Calgary, Alberta-based company’s board decided to withdraw from the takeover field over the weekend as it became clear that political and industry opposition was too great.

William Ackman, CEO of Pershing Square Capital Management LP and a major Canadian Pacific shareholder who actively backed the railway’s merger ambitions, approved the retreat, Mr. Harrison said.

A number of powerful interests including the U.S. Army and a top antitrust official with the U.S. Department of Justice recently raised concerns about the competitive effect of the merger. Canadian Pacific’s complex plan to hold Norfolk Southern in a trust until transportation officials completed a lengthy review of the proposed combination also drew opposition.

Virginia-based Norfolk Southern said its board was committed to “enhancing value for shareholders,” focusing on a five-year plan to eliminate $650 million of annual expenses. The U.S. railway ranks as one of the least efficient of North America’s major carriers.

“We are confident the continued execution of our plan will deliver superior value to all of the company’s stakeholders by best positioning Norfolk Southern to succeed,” the company said in a statement.

Canadian Pacific has been aiming to eliminate bottlenecks in busy rail hubs such as Chicago by merging with an Eastern-based railway to create the first transnational railway in the U.S.

The Canadian railway launched its Norfolk Southern pursuit in November, after a failed attempt in 2014 to combine with CSX Corp. As Norfolk Southern’s board and others voiced opposition, Canadian Pacific quietly—though unsuccessfully—tried to revive talks with CSX in January.

Some regulators, shippers and industry officials have raised concerns that any rail merger would trigger further consolidation, reducing North America’s current stable of seven major carriers to only a few. But with Canadian Pacific’s retreat on Monday, any further merger activity is likely now on hold for the near future. The U.S. Surface Transportation Board adopted rules in 2001 that place a heavier burden on merger applicants to show that a major deal is consistent with the public interest by enhancing competition.

Without the stimulus of a merger, Canadian Pacific faces pressure to boost its slumping earnings and stock price amid a commodity-price rout that has sharply reduced the volume of oil and mining products on the rails. Some analysts have predicted the railway will announce a significant share buyback.

Canadian Pacific reported lower fourth-quarter earnings and revenue in its final quarter of 2015, hurt by a drop in several key freight volumes. Its stock has also fallen sharply from a high of about $214 in October 2014.

Canadian Pacific shares were recently up nearly 4% at $140 in New York. Norfolk Southern shares declined more than 2% to $79.74.

Mr. Harrison had predicted that support for a transnational railway would increase as the U.S. economy pulls out of the commodity-price slump.

“When we have a rebound there will be problems. Where are we going to put all the oil? Are we going to put it on the highways?” he said.

| Posted in Railways

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