Canadian Pacific Said to Explore Norfolk Southern Takeover

[thelakelander]

Canadian Pacific Railway Ltd., the second-biggest railroad in Canada, 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 shares surged on the news.

Canadian Pacific is raising financing and has held early-stage merger talks with Norfolk Southern, which is valued at about $24 billion, said two of the people, who asked not to be identified because deliberations are private. Discussions are preliminary and talks may not progress or lead to a deal, they said. Representatives for Canadian Pacific and Norfolk declined to comment.

A move for Norfolk Southern, the second-biggest railroad in the eastern U.S., would revive Canadian Pacific's effort to build a transcontinental carrier after talks with CSX Corp. failed last year.

Full article: http://www.bloomberg.com/news/articles/2015-11-09/canadian-pacific-said-to-explore-takeover-of-norfolk-southern

[The_Choose_1]

I believe CP went after CSX last year? I also believe the United States of America would turn down this takeover. I could see Union Pacific or BNSF taking over NS or CSX one day but not CP.

[The_Choose_1]

Oh Fuck! Just got news that this could really happen.    I hope the United States tells CP NO!!!!

Riding the Rails With Bill Ackman
Nov 9, 2015 5:43 PM EST
By Brooke Sutherland

Canadian Pacific has a new target, and a better shot at getting a deal done.

The railroad backed by Bill Ackman (yes, that Bill Ackman) is exploring a takeover of $26 billion U.S. carrier Norfolk Southern, Bloomberg News reported Monday, citing people familiar with the matter. The approach comes about a year after Canadian Pacific tried and failed to strike a deal with CSX.

A lot has changed since then. For one, the rail industry is one of the few areas where potential targets have actually gotten cheaper. Since peaking last November, the S&P 500 railroads index has reversed course to drop almost 30 percent as falling commodity prices eroded crude oil and coal volumes.

When stock markets had their meltdown in August, Norfolk Southern dropped to its lowest valuation relative to profit in more than two years.

The climate for mega-deals is also more welcoming. Canadian Pacific's approach to CSX itself forced investors to rethink the notion that regulatory constraints would limit any further railroad consolidation. And given the flurry of $50 billion-plus deals that have been struck across industries this year, a giant east-west railroad combination seems like less of a stretch.

Like CSX, Norfolk Southern focuses on the eastern U.S. The two have almost identical market caps. Norfolk Southern may be a bit more vulnerable, though.

Norfolk Southern has trailed CSX in terms of revenue performance during the past three years, and the trend is set to continue. Norfolk Southern CEO Wick Moorman, who bashed the idea of a major railroad merger as "highly problematic" last year, is also no longer in charge of the company. He handed over the CEO reins to James Squires in June and stepped down as chairman on Oct. 1. 

There are still challenges to a deal. The seven largest U.S. and Canadian railroads account for more than 90 percent of North American rail revenue, whereas the top 10 trucking companies make up only about 10 percent of that industry's revenue, according to Bloomberg Intelligence. So regulators are going to give any big rail transaction a tough review.

Norfolk Southern is also a bit of an odd choice considering that Canadian Pacific literally just sold a chunk of its Delaware & Hudson line to the company in September. And without taking any synergies into account, a deal wouldn't be as accretive for Canadian Pacific  as a combination with CSX, according to data compiled by Bloomberg.

Canadian Pacific must see something it likes though, and there's no time like the present to give a mega-deal another shot. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

http://www.bloombergview.com/articles/2015-11-09/canadian-pacific-has-a-better-shot-at-mega-deal-now?cmpid=yhoo.headline

[spuwho]

Simply put, NS is the weakest of the east coast rail properties and relies on coal more than any other.

From a route perspective, CSX merged better with CP than NS does but the differences are fairly minor.

BNSF already tried to merge with CN years ago to form North American Railway. And that was denied. The only thing in common between that attempt and this one is one person.

Hunter Harrison.

The markets for commodities is hurting all US railroads.

China's recession has killed export metallugical coal
The switch to cheap natural gas from coal for power
The plunge in oil prices killing frac oil and sand biz

UP has started storing excess capacity all over its system due to the drop in Powder River coal and frac oil

BNSF and CP had just started increasing capacity in the Bakken range when prices collapsed.

Also, US railroads are in the middle of a change over to new EPA Tier 4 regs on their diesel engines. There is a huge backlog of orders for the carriers to replace their engines.

The uncertainty of the PTC laws has been cleared by Congress with a 3 year extension of the deadline.

The world of rail is going through some major shifts.

[spuwho]

NS rejected the second offer from CP.  Once again said that a NS/CP merger would bring no value to shareholders.

CP is now going to take it up with several institutional shareholders.

NS says legal counsel and advisors have told them that to pass STB muster, they would have to gut and spin off many lines, of which many of them are idle due to the coal depression internationally.

That leaves only auto parts and commodities for NS to defend with.  CP with NS will get them new east coast ports and a smoother transition around Chicago, but unless coal makes a huge comeback, not much for NS to offer going west.

[I-10east]

Many always predict this modern day 'MergingMania' to sweep the North American rail industry, but it never happens....

[spuwho]

CP is getting testy, they don't like the fact that the other carriers are poo-pooing the merger proposal.

Reading this its pretty clear CP wants more leverage in transiting Chicago. What is interesting is that CP has proposed ways to clear up the Chicago traffic jam, but it means NS, BNSF & UP giving up their loads sooner, something they shudder at.  So we have basically a slow moving chess game in Chicago.

Per Trains:

http://trn.trains.com/news/news-wire/2015/12/23-cp-says-ns-merger-would-improve-chicago-operations-officials-from-other-railroads-disagree

CP says NS merger would improve Chicago operations; officials from other railroads disagree



CALGARY, Alberta – Canadian Pacific's contention that its takeover of Norfolk Southern would ease congestion and create capacity in Chicago has operating officials from other railroads scratching their heads.

Trains News Wire interviewed several current and former operations executives about CP's plans to divert traffic away from Chicago. Not one of them sees how it is possible for a CP-NS merger to reduce congestion or free up capacity in Chicago in any meaningful way. And they all say that nothing CP is proposing would require a merger to accomplish.

Everyone agrees that operational problems in Chicago – which handles a quarter of the nation's rail traffic – must be addressed. But CP is the only railroad pushing a merger as one of the solutions.

"Improving Chicago is a key objective of this transaction and one of the many ways it is in the public interest," CP CEO E. Hunter Harrison said last week in a letter to members of the Illinois congressional delegation, who had written to the Surface Transportation Board to express their concerns about a potential merger. "You can fully expect that this will be a major component of a compelling case to the STB."

About 37,500 freight cars pass through Chicago every day, according to the Association of American Railroads. CP hauls about 2,500 of those cars, and about 20 percent of those – or 500 cars – could be diverted out of Chicago via other gateways on a combined CP-NS system, CP says.

That amounts to little more than 1 percent of Chicago's total daily traffic.

"They are overselling Chicago," says Mark Hinsdale, who was a general manager for CSX in Chicago, served as a network strategy executive in CSX's headquarters, and was the railroad's representative on the Chicago Planning Group from 2004 through 2011.

"They don't run enough trains in Chicago compared to the other players," Hinsdale says. "If they diverted every train they ran it wouldn't do that much."

Over the past year or so, a group of retired railroad executives has looked at ways to relieve congestion in Chicago. Mergers were not among their recommendations, according to a person familiar with the group's report.

A current operations executive from a Western railroad said that a lot can be done to untangle Chicago without merging railroads. "CP's acquisition of NS would have no meaningful impact that wouldn't be achievable otherwise," he says. "The railroad does not have to merge...to help things in Chicago. Like NS said, there's very little traffic that flows from CP to NS and vice versa."

NS CEO James Squires said earlier this month that less than one trainload of CP-NS traffic could be efficiently rerouted around Chicago per day – a drop in the bucket compared to the 500 or so freight trains that run through the Windy City on a typical day. The operations officials contacted by Trains agreed with Squires' assessment.

Last week, Union Pacific said that it's possible that rather than reduce congestion, a CP-NS merger could create more gridlock if the combined system used its Chicago routes to favor its own trains at the expense of other railroads' traffic.

"The railroads have made great strides to increase network fluidity in Chicago without a merger by revising the Chicago Planning Group congestion alert plan from being consensus-based to metrics-based," UP said in its letter to investors. "The railroads also established a joint operations center in Chicago in which CP elected not to participate."

CP disagrees.

"We don't think we are overselling Chicago," says James Clements, CP's vice president of strategic planning and transportation services. "Twenty-five percent of all U.S. rail freight touches Chicago and it remains a fragile gateway that is potentially one snowstorm away from another significant issue. Any car that can avoid Chicago helps."

In its preliminary analysis, CP believes it can get 120,000 car handlings out of Chicago annually through the use of bypass or run-through manifest blocks destined for interchange with CSX, BNSF Railway, and UP at alternative gateways. "By diverting hand-offs, each car is an extra car of capacity for all other users of the Chicago network," Clements says.

CP's supply of automotive railcars is highly dependent on Chicago. "By sourcing railcars in Kansas City and/or St Louis, a combined network would be able to supply Southern Ontario without touching Chicago," Clements says, noting that this would remove another 20,000 cars from Chicago annually. Plus, NS's former Wabash route linking Kansas City with Detroit is 10 percent shorter than CP's current KC-Chicago-Detroit routing that's used to supply automotive assembly plants in Ontario.

Consolidating CP and NS intermodal operations would eliminate two cross-town train movements per day. And by using alternative gateways east of Chicago – such as Detroit and Buffalo – a combined CP-NS system would remove another train per day from the Windy City.

All this would benefit customers on the combined system, CP contends.

"Over 40 percent of traffic that CP interchanges to another carrier is interchanged in Chicago. The changes to movements described above are a significant portion of our total Chicago interchange traffic," Clements says. "The changes...will make a positive improvement in the transit performance of the traffic of hundreds of customers."

There may be more opportunities, Clements says, but CP can't determine what those might be until it can sit down with NS – something NS has so far refused to do as it seeks to remain independent.

The current and former operating officials who spoke with Trains said there were several steps CP could take to improve its ability to get through Chicago, including increasing its use of the Indiana Harbor Belt or considering directional running over the IHB and Belt Railway of Chicago.

CP owns 49 percent of the IHB. Conrail – which is owned by NS and CSX – owns the other 51 percent. But because of the way the IHB ownership is structured and held at Conrail, CP cannot get a controlling interest in IHB by acquiring NS (or, for that matter, CSX).

"They don't use the Harbor as much as you would think a 49 percent owner would," Hinsdale says. The IHB has been improved through the Chicago CREATE program, including new connections, more double track and signaling that have allowed higher speeds. But railroads, including CP, have chosen to use lower-cost routes instead.

"We do believe that the transaction gives us more influence on the IHB in the future and more flexibility," CP's Clements says. "We would use that influence to improve the efficiency to the benefit of all traffic moving to/from or through Chicago. We currently work with all the options in Chicago today in terms of routing traffic and use the various options as appropriate for flows, volumes, details of various agreements, and overall Chicago network health."

Operating executives questioned how diverting interchange to lesser-used gateways around Chicago would work. There's not much additional capacity available at the alternate gateways, either in terms of trackage or crews, they note. And other railroads have been reluctant to divert traffic from Chicago if it reduces their length of haul.

CP said a merger would allow it to divert traffic from Western Canada to the Detroit and Buffalo and Albany, N.Y., gateways to connect with points on the NS network. Sending this traffic north around Lake Superior, however, is 1.5 percent longer than a Chicago routing and takes three additional crews. But CP says it can be more consistent – and even faster – than fighting Chicago congestion. "The increased speed and fluidity more than makes up for the few extra miles," Clements says.

"We believe gateways such as Buffalo and Detroit, which on a combined network would just be stations on the new network, not interchange locations for NS traffic, have the capacity to handle the volumes," Clements says.

Why not divert this traffic now?

"Many of the diversions are not taking place today as each individual carrier is optimizing the haul on their network and not taking a system view," Clements explains. "A combined network changes the perspective."

Chicago has long been the Achilles heel of the CP system.

Unlike rival Canadian National, CP has lacked its own route from Ontario to the Windy City. Instead, CP runs 10 trains or so per day between Detroit and Chicago over trackage rights on NS and must contend with clearance issues in the Windsor Tunnel, which can't accommodate full domestic double-stacks. CP also lacks an efficient way through Chicago – something CN gained with its 2009 purchase of the Elgin, Joliet & Eastern.

On Monday, CP emphasized the need to improve fluidity in Chicago and criticized CSX, NS, and UP for their plans to shut down for Christmas. CP will continue to operate during the holiday.

"Our economy runs year round and shippers must be able to get their goods to market in a timely fashion, regardless of the date or the amount of snow on the ground," said Keith Creel, CP's president and chief operating officer.

[Ocklawaha]

Many always predict this modern day 'MergingMania' to sweep the North American rail industry, but it never happens....

Oh it HAS happened before my friend...
ACL-SAL-L&N-GA-CLINCHFIELD-WRY OF A-C&O-B&O-WMD-NYC/CONRAIL = CSX
SOU-N&W-NS-NICKEL PLATE-WABASH-PA/CONRAIL-EL= NS
UP-D&RGW-WP-KATY-MP-TP-SP-C&NW = UP
SANTA FE-BURLINGTON-FTW&D-NP-GN-SP&S = BNSF

ETC...

What they are speaking of is a grand finale round where the remaining giants merge to Atlantic and Pacific systems together, CP + NS or perhaps BNSF + NS or UP + CSX or CN + KCS or...

What is a certainty, because it has been publicly announced as recently as last week by BNSF's CEO is whoever starts it and however it starts, everyone will be involved, "BNSF will play," was part of his statement. So we sit and wait, will the remaining 8 North American Class 1's to pare down to 4.

[Ocklawaha]

However it goes with CSX, if this happens it will lessen the value of the 'A' Line, making a spin-off (think Florida East Coast/AAF) more likely. Getting rid of 4 drawbridges: McGirts Creek (Ortega River), Rice Creek, St. Johns River (Palatka), St. Johns River (Sanford). There is no remaining industry of any real consequence between Jacksonville and Green Cove Springs or Palatka and Sanford.

There is nothing official on this subject, but my gut tells my crystal ball to watch for it.

[I-10east]

Many always predict this modern day 'MergingMania' to sweep the North American rail industry, but it never happens....

Oh it HAS happened before my friend...
ACL-SAL-L&N-GA-CLINCHFIELD-WRY OF A-C&O-B&O-WMD-NYC/CONRAIL = CSX
SOU-N&W-NS-NICKEL PLATE-WABASH-PA/CONRAIL-EL= NS
UP-D&RGW-WP-KATY-MP-TP-SP-C&NW = UP
SANTA FE-BURLINGTON-FTW&D-NP-GN-SP&S = BNSF

ETC...

I was referring to the this current era concerning the big Class 1 railroads. The rumors of CP supposedly merging with CSX or NS; UP supposedly merging with BNSF, CNR or whoever and on and on. 

[Ocklawaha]

I didn't know if you were aware of the fairly recent historical trends. As you said everyone is waiting for the next movement to start but so far...nada!

BNSF Railway Executive Chairman Matt Rose
FORT WORTH — In case you haven't heard, BNSF Railway is prepared to intervene in any merger proceeding involving Canadian Pacific Railway and Norfolk Southern, and to even seek out its own merger partner, the railroad's executive chairman told Trains News Wire on Thursday. "If it's going to happen, we're going to play," said Matt Rose in an interview with Fred W. Frailey.

Without explicitly saying so, Rose implied that the obvious partner for BNSF in a merger would be CSX Transportation. A CP-NS merger, he said, would have NS's profits being taxed at Canada's lower corporate tax rate, putting CSX at a competitive disadvantage.

When it happens Jacksonville is going to take a massive hit unless our city and chamber bring their A game!