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Report: Canadian rail company eyes Norfolk Southern for takeover

NORFOLK

Norfolk Southern Corp. is in the cross hairs of Calgary-based Canadian Pacific Railway Ltd., which is exploring the possibility of taking it over, according to a report by Bloomberg News.

The Canadian railroad, the second-largest in that country, has already been working on financing for a possible deal and has been in “early-stage merger talks” with Norfolk Southern, which is valued at about $24 billion, the report stated, citing “people familiar with the matter.”

The Norfolk-based railroad declined to address the report.

“We don’t comment on rumors,” said Susan Terpay, a Norfolk Southern spokeswoman.

Canadian Pacific did the same: “CP does not comment on market rumour and speculation,” said spokesman Martin Cej in an email.

The report comes just a little more than a year after Canadian Pacific made a similar move to merge with Florida-based CSX Corp., Norfolk Southern’s rival. News of the end of that round of merger talks came in late October 2014, about a week after reports began to circulate.

Norfolk Southern has about 30,000 employees, more than 1,150 of those in Hampton Roads. It is the second-largest railroad on the East Coast; CSX is No. 1. Norfolk Southern is one of three Fortune 500 companies headquartered in the region; the others are Chesapeake-based Dollar Tree and Newport News-based Huntington Ingalls Industries Inc .

A year ago today, Norfolk Southern’s stock closed at a record high, within days of media reports that it might be next on Canadian Pacific’s list.

In an October 2014 teleconference with analysts, Wick Moorman, then-chairman and CEO of Norfolk Southern, said “a major railroad merger is not a good idea,” when asked about the idea of rail combinations.

He cited three main reasons: the difficulty in putting such big companies together and the significant service problems that historically result for some time; that “there aren’t that many overlapping routes, there aren’t that many redundant facilities;” and a nonreceptive regulatory environment.

Moorman recently stepped down as executive chairman, leaving James Squires, already Norfolk Southern’s president and CEO, as its new chairman, effective Oct. 1. Moorman is serving as senior adviser to Squires through Dec. 31, when he will retire as a Norfolk Southern employee.

While Squires is new in the job, he’s not new to the company, “which has a very strong culture, so I would be surprised if he had a different position,” Anthony Hatch, a New York-based independent railroad analyst, said Monday.

He said he considered a merger between the two railroads a long shot:

“I think the odds are low. I think there could be benefits, but I think the risk-reward ratio tilts heavily toward risk – operational, cultural, financial and, most importantly, political.”

Any merger would have have to be approved by the U.S. Surface Transportation Board as well as Canadian regulators.

Jason Seidl, a Cowen and Co. analyst who follows Norfolk Southern, was more optimistic about the possibility of a deal, in an industry update issued Monday. A Canadian Pacific-Norfolk Southern “merger could be beneficial for the two carriers in the long term, and while a big rail transaction typically involves a tough integration phase, shareholders may view this one as a rare opportunity to maximize their value in an otherwise weak market; and shippers may be less vehemently opposed to a merger today than they were a year ago when service was much worse.”

Seidl said Cowen believes Norfolk Southern’s management “is less likely to quickly rebuff CP’s offer in today’s environment than in the case of CSX’s management last year, when coal, however weak then, was still not as bad as today.”

Norfolk Southern recently reported that coal revenue for the third quarter slipped 23 percent from the same quarter a year ago. It has faced continued weakness in its coal franchise in recent years: While coal accounted for about 31 percent of railway operating revenue in 2011, it dropped to about 21 percent in 2014, according to annual reports.

Hunter Harrison, CEO of Canadian Pacific, told analysts last year that “consolidation was the best way to increase capacity in an industry that badly needs it, at a time when volumes are growing, regulators are slowing oil trains and communities are resisting trains altogether,” according to a Wall Street Journal report.

Norfolk Southern’s stock, which on Nov. 10, 2014, closed at $116.60 in trading on the New York Stock Exchange, closed Monday at $88.62, up $8.75 a share.

Posted to: Business Ports and Rail

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