Proposed Norfolk Southern NS Canadian Pacific CP Acq/Merger

This almost seems that if Ackman/Harrison could not succeed with the first (CSX), then try the other. The first was "DOA"; dare say same is ahead for this one.

While not for one moment do I wish to discount Bloomberg as a recognized news source, it is nevertheless quite segmented towards the business community. Of the two major nationally circulated newspapers, Times and Journal, only The Times carried the story:

http://www.nytimes.com/2015/11/10/busin ... thern.html" onclick="window.open(this.href);return false;

Fair Use:

If at first Canadian Pacific could not succeed in buying a fellow railroad operator, it looks prepared to try again with another target.

Canadian Pacific has held preliminary discussions with Norfolk Southern, one of only a handful of operators that control the roughly 95,000 miles of top-quality railroad tracks in the United States, a person briefed on the matter said on Monday.

Canadian Pacific, one of Canada’s biggest railroad operators, has also hired advisers.

Still, the two railroads ultimately may not reach a deal, this person cautioned. In a statement on Monday afternoon, Canadian Pacific said that it had no “material news” to report at the moment, and declined to comment further. A spokesman for Norfolk Southern declined to comment.

If a deal is reached, it would be the latest reshaping of the North American rail industry, which has rapidly consolidated since the government deregulated the sector in the early 1980s. That has led to a severe winnowing in the number of companies, from 56 so-called Class I railroads in 1975 to seven in 2005

Oh well, hope someone profited from the "one day pop". Guarantee you I didn't.

Now if CP is so possessed with the "urge to merge", I would think their most attainable target would be KCS. In the linked discussion, Mr. Engineer Spike has thoughtfully laid out the pros and cons of such a proposal and are worthy of a review. While once upon a time, say last century, railroad mergers were sought as a means to combine facilities in an industry that was contracting, we now have a stable industry that hopefully will again be expanding and in which case an "end to end" would be preferred. As Spike noted, both Canadian roads would enjoy Lakes to Gulf capacity on their own rails enabling Canadian agricultural and petroleum products easy access to the ports.

Now KCS's interest in the former NdeM lines (now branded KCS-M), might present a problem. BNSF would expect that any existing interchanges they have with those Mexican lines to be considered "open gateways" and that full cooperation would be expected in effecting an interchange even if the combined CP/KCS interests were to be adversely affected. All told, CP/KCS appears to be the last logical merger left - well that is until someone proposes a merger amongst the "Big Four" to form a duopoly of transcontinental systems.

viewtopic.php?f=51&t=155197" onclick="window.open(this.href);return false;

Is CP looking to obtain control of the IHB or is there more to this deal? EHH talks about improving service, efficiency and capacity through merger. The IHB is owned by Conrail, which in turn is jointly owned by CSX and NS each owning 25.5% each and CP owning 49%; getting either eastern system would make CP the majority owner. CP would also have to get across Michigan to make it all work on their own track, which a merger with NS would solve. Getting NS is going to cost big dollars, where will all of the savings and efficiency be in the end if they do go for the merger for both railroads after merger costs? If CP is trying the get control of the IHB, why didn't they try to work a deal with NS during the D&H sale? NS could have given CP a few percent of the IHB and the Michigan line to Detroit (wasn't Watco going to jointly own this line with NS some years ago so it is not as if NS really wanted this line) in exchange for the south end of the D&H closing a big hole in the CP system and giving NS access to New England at the same time.

Thank you for your kind comments, Mr. Norman. Coming from you, that is a sincere compliment.

My take is that the next round of mergers will eliminate the stagnation in the Midwest. One big item of news has been the new flyover of the Rock Island. Other improvements there are in the pipeline too.

I say this for a reason. Right now the middle ground is Chicago. Neither the eastern nor western roads want to loose a dime by being short hauled. I'd say this is more a western concern, since BN goes to Memphis, but NS goes to KC, and St. Louis. There has been discussion elsewhere on this forum about the underutilization of this gateway. The sole reason is that the western road would loose out.

One example would be a car loaded anywhere on CSX (for agreement sake, let's pretend it happened). CSX would of course want the car to go to Chicago, which would produce maximum $. Screw the customer! 3 days to make it from Barr to Bensenville. If they merged, then it would not matter if the car went via Chicago, Buffalo, or Albany. Whichever route produced the best cost/mileage/expedience for the customer would fly.

To this point, I wonder if a contract to move the car was signed now, with unmerged carriers. If the shipper designated a route, would CSX screw them somehow? They sure would do anything to make sure the car stayed on CSX as long as possible. I'm sure CP would do the same. Route a car it originated, send it to Albany.

My big question is what's next? There will have to be a 3 way merger at some point. UP and Buffett's New Santa Fe will loose out on overhead traffic. An eastern+CP would screw them silly. Imagine a load from Boston. It would likely go to Chicago, and interchange. Now it could go to Vancouver! Here you go BN, go spot it up there in Seattle!

There is talk about what a KCS-CPR merger could do. It would give CP a Gulf Coast access, like CN has with the IC. It would also give Mexican access which CN doesn't have. The only common point is KC. This is obvious to anyone who has the slightest knowledge. The crux of the problem is making it work. The IC&E is no "Mainline of Mid America." CP would have to spend millions to make it go. This route is largely unsignaled, and track is not great. I've seen it. While on BN, we had rights there. I also had a friend who worked for IMRL. How much has been spent on it since CP took back over? If this does come to pass, attention may need to be diverted here. How spread thin would CP be? Right now the focus has been on CTC for points north, on the SOO. This has been mainly for the oil, but I'm sure that some of the Canada-Mexico traffic would be from points west. This makes for a two front battle.

Let's sit and watch if the other CEOs start thinking about merging. Are they secure with running what they now have? CP needs to merge, in my opinion. As CPF363 says, they have significant gaps, ie. Chicago-Detroit. Buffalo east was another, but is now moot. An eastern could give deep market penetration in the east, which D&H was too small to accomplish, especially post Conrail.

Many merger rumors are started by speculators out to make a quick buck. Investment bankers are also part of the game. They are the ones who initiate most of the big mergers by buttonholing corporate bigwigs and touting the advantages of a merger with another company and incidentally, how generous the corporate bigwigs' "golden parachutes" will be when the merger closes.

CPR is unlikely to launch a hostile bid for NSC if NSC rejects their overtures. But if CPR does put NSC "into play," UP and BNSF will enter the bidding.

I wonder what roll the Canada Pension Plan Investment Board will play in financing the merger?

You may be right, Harry. CPR is pretty bare bones now. I wonder how much more Hunter can squeeze out. Maybe Ackman will try a hostile takeover elsewhere. Maybe he could install a board, whose members are supportive of a merger. Perhaps another fund will try to cash in on another railroad. I think that the eastern roads are easy picking now, due to a soft economy, and their core coal business depressed.

talltim wrote:NS+CP=Southern Pacific

That's one way to get Industry Canada to block the sale...

I have to ask - Mr Norman - your post was right to the point and the feeling I get is that, from your point of view, this deal does not get done. Engineer Spike - I have to ask - do you? You said CP needs to merge, and I can understand that in the long run for their company, however is his deal the one that gets it done?

Now - in the interest of full disclosure - I work for NS. The culture of my company is pretty nice. There is a lot of pride in my office for being an NS employee. I fear this to be washed away (along with a lot of employees) under the reign of EHH, who will most certainly gut my company and the projects it does (steam, heritage, etc..). Word around my office is of two mind sets. First - we (along with all railroads) are struggling due to coal and this may result have dire consequences such as this merger. However - that being said most people do not believe this would happen. Partly because NS knows what EHH will do from the top on down, but also because the STB and the Canadian transportation authority wouldn't allow it. It would seem to me that should the STB allow this to go through the CSX must be gobbled up by someone, and at that point the US Gov has consigned the vast majority of all US rail into a basic duopoly, which while good for a company - it would be terrible for consumers, shippers, etc. the balance now in the US - 2 in the east and 2 in the west, maintains balance.

I'm not sure how this would play out. I think that if the STB gave the go ahead the UP and the BNSF would certainly start bidding in as well, or maybe just outright go for CSX. And perhaps in the near future what you would end up with is CP/NS - UP/CSX and then BNSF/CNI. And essentially have 3 transcons that control 90% of all rail shipment in North America. I can't see how this could possibly be good for anyone outside of a shareholder

So I guess I'll defer to the experts. What kind of odds do you guys give this kind of thing? Alternately - should this fall through but the merger discussion continues - I would think the hurdles of say - BNSF buying NS or the UP buying CSX may have to go through less scrutiny than a Canadian company gobbling up a large chunk of US rail. While I would personally rather see this scenario of something were to happen - how likely given our STB would it be?

I think that the ability to pull something like this depends on the political environment.. At this point, the election is under a year away. Canada just had a big shift, and now Harper, and his conservatives are out. I don't think the Liberal Party would be so receptive.

One thing that I am sure of is that the snowball may turn into an avalanche. I read "The Men Who Loved Trains". At one point it spoke of a SOU-MP deal. This got the ball rolling for MP-UP, SOU-N&W, Family Lines-Chessie, and SP-ATSF. This same scenario seems to be about to be played out again.

With the soft economy, and coal depression, maybe Hunter is willing to be the crash test dummy, and see if either government would let this fly. If the US is receptive, but not Canada, them we might see the two westerns each merge with an eastern. We might end up with 3 systems. If not, then I see a three way for the reason, which I posted in my first, long post. UP-MP-WP all over again.

I wouldn't worry too much about CPR's management. They may hang on, but I'd be surprised if they could do a cash only deal. If NS stockholders have to trade NS for the new company, then there would be more outside influence. Ackmqn's holdings would get diluted. Who knows if he could, or would put anymore into it.

Engineer Spike wrote: I wouldn't worry too much about CPR's management. They may hang on, but I'd be surprised if they could do a cash only deal.

The Canada Pension Plan Investment Board could easily finance a cash-only NSC bid by CPR. I understand that they partially financed the recent purchases of Puget Sound Energy, CH Energy Group, Central Vermont Public Service and the pending Teco Energy purchase all by Canadian companies.

Unlike Social Security where the excess funds collected over what's paid out in SS payments is "invested" (actually spent by the Congress)in US Government IOU's, the Canada Pension Plan (and let's not forget the Quebec Pension Plan) is not permitted to "invest" in Canadian Government bonds. They invest excess funds in foreign and domestic stocks, corporate bonds, real estate, mortgages, business financing, rail car leasing, mezzanine loans etc. etc. This deal may be something that they like.

Things heated up a bit yesterday. WSJ reported EHH met with Squires on Friday to propose the buy out. If WSJ article is correct it doesn't sound like it went particularly well

Here is link and Fair Use quotation from the Journal article immediately noted by Mr. Jeep:

http://www.wsj.com/articles/canadian-pa ... 1447460211" onclick="window.open(this.href);return false;

Fair Use:

The chief executive of Canadian Pacific Railway Ltd. met with his counterpart at Norfolk Southern Corp. on Friday and proposed a merger of the railroad giants, an advance that was met with a chilly reception, according to a person familiar with the matter.

Canadian Pacific CEO Hunter Harrison outlined a variety of possible scenarios—including merging the companies or another form of partnership—in his meeting with Norfolk Southern Chairman and CEO James Squires, the person said.

Mr. Squires was cool to the approach, the person said, and CP is now considering taking its proposal public to put pressure on Norfolk Southern.

Jäger, have you "got it" to mount a hostile; because that is what I think you are looking at.

Looks like CP has made NS an offer to merge:

http://www.theglobeandmail.com/report-o ... e27304614/" onclick="window.open(this.href);return false;

Both The Times and Journal have stories at their websites. It appears that the news broke "after the close" and possibly too late for their print editions.

http://www.wsj.com/articles/canadian-pa ... 1447796362" onclick="window.open(this.href);return false;

Fair Use:

Canadian Pacific Railway Ltd. on Tuesday said it sent a letter to Norfolk Southern Corp. outlining a proposal—valued at more than $28 billion—for a combination of the two railroads, in a public pitch to increase pressure on its rival and get a deal done.

Alberta-based CP said the proposal includes a sizable premium in cash and stock, but it didn't provide any numbers. It said the combined company could produce faster earnings growth, and made a case it could win regulatory approval, perhaps the biggest hurdle to the deal.

“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,” the railroad said in its statement about the letter, which it didn’t release.

In a statement late Tuesday, Norfolk Southern said it had received an “unsolicited, low-premium, nonbinding and highly conditional indication of interest” from Canadian Pacific to acquire the company.

Norfolk Southern said the offer is $46.72 in cash and .0348 shares of CP for each Norfolk Southern share, which at CP’s NYSE closing price Tuesday would be worth $94.95, or more than $28 billion. That would be a 9% premium to Norfolk Southern’s current price. Before word broke earlier on Nov. 9 of an approach, which sent Norfolk Southern shares up, the offer would have been a 17% premium.

http://www.nytimes.com/2015/11/18/busin ... thern.html" onclick="window.open(this.href);return false;

Fair Use:

The exchange marks a strange turn in what represents the latest effort to bring about consolidation within the North American rail industry. A year ago, Canadian Pacific, based in Calgary, attempted a combination with the larger United States railroad operator CSX, which would have created a transcontinental railroad. But CSX spurned the offer.

Reports that Canadian Pacific was back in the hunt for a merger have swirled for weeks. On Nov. 9, Canadian Pacific said there was no material news pending, despite those reports. Earlier on Tuesday, its chief operating officer said at a conference in Canada that consolidation in the industry was inevitable.

Thus far, the two rail operators have met just once, this past Friday, according to a person briefed on the matter but not authorized to speak about it publicly. During that encounter, Norfolk Southern’s chief executive, Jim Squires, told his counterpart, E. Hunter Harrison, that he did not believe a merger made sense.

Mr. Squires emphasized that the deal, which would be reviewed by the Surface Transportation Board in the United States, would probably not pass regulatory muster, the person added.

It certainly appears that Jäger and Ackman are being their audacious selves.

But from one who has been following railroad industry affairs since Penn Central was proposed during 1958, this one has many a hurdle to clear. However, I find Mr. CP's thoughts regarding The Harbor interesting. Jäger must think "I got CN the J; now I get CP the Harbor".

The Tuesday closing price for NSC was $86.97. The current bid and asked prices are 91.50/91.61. This is at 09:00 before the market opens. The high price for the year was $117.64 on 11/26/2014. If EHH is deadly serious and makes a formal bid for NSC, it will cost CPR a lot more than it's offering in cash and stock. Stay tuned.

The Journal has further reported upon the proposal as set forth by "Bill and Jäger":

http://www.wsj.com/articles/canadian-pa ... 1447851465" onclick="window.open(this.href);return false;

This would be in line with Mr. HarryE's report that NSC was trading "after hours" in the $90 range.

Fair Use:

Canadian Pacific Railway Ltd. on Wednesday released the full details of the merger-proposal letter it sent to Norfolk Southern Corp. , confirming a cash-stock offer that it said would value the combined company at $270.68 per share.

The terms of the offer, at $46.72 in cash and 0.348 shares of the merged company for each Norfolk Southern share, are in line with figures released by Norfolk Southern late Tuesday.

Based on CP’s closing price Tuesday, the offer would be worth $94.95, or more than $28 billion.

According to the text of the letter, CP said the merged company would be listed on both the New York and Toronto Stock Exchanges, with Norfolk Southern shareholders owning 41% of the new company.

CP said it based the $270.68 per share value of the new entity in part on the “substantial synergies” created by a merger and a completion date of Dec. 31, 2017.

"Synergies"; that was a "buzzword" back when NYC+PRR and ERIE+DL&W were proposed. Both were evidently a "leaky lifeboat offering a line to a sinking one" and were parallel in nature. NS/CP is an end to end, just as would any possible combination amongst "the standing seven" be.