CP remains committed to making a major acquisition despite obstacles

In the freight railroad sector, it truly seems that there is a press release issued by a Class I railroad carrier or a national news item with a common theme: railroad consolidation.

This mostly stems from Canadian Pacific’s well-documented and myriad overtures to acquire Norfolk Southern, which has proved unsuccessful at least to this point but not over by any stretch either.

Earlier this week, CP said it petitioned the Surface Transportation Board for a declaratory order confirming the viability of the voting trust structure CP has suggested as part of its proposed merger with Norfolk Southern Corp. (NS), whicb CP CEO Hunter Harrison said has been requested by CP and NS shareholders in order to better understand how the STB views the proposed voting trust model.

And this followed a resolution CP submitted to NS shareholders with the intent to compel the NS board of directors to meet with CP to engage in talks about a transaction. CP said that it is confident CP-NS combination “would create a true end-to-end transcontinental railroad that would enhance competition, benefit the public and drive economic growth,” adding that NS shareholders can vote on this resolution at the upcoming NS annual meeting.
But as has been clearly noted, NS continues to say “thanks but no thanks.” On February 9, it issued a statement explaining that it believes further discussions are not in the best interests of NS shareholders unless CP offers NS shareholders compelling value and addresses the regulatory issues inherent in its proposal.”

What’s more, it pointed out that the NS board has carefully considered and unanimously rejected each of CP’s three unsolicited acquisition proposals, explaining that each proposal was “grossly inadequate” and would face substantial regulatory risks and uncertainties that CP would be highly unlikely to overcome.

While CP may not be getting the traction it wants with NS, that does not mean it is done trying to make a deal to get to where it wants to as far as becoming a transcontinental railroad entity.

That was made clear in a Wall Street Journal report issued this week that said CP was revisiting its interest in acquiring the other major eastern railroad, CSX, with the report saying that it approached CSX in January as it wants to keep its options open while remaining committed to its proposed $30 billion acquisition of NS.

So, what happens from here remains to be seen but it is clear CP remains committed to the cause for certain.

As previously noted in this space, in various freight transportation and logistics sectors, merger and acquisition activity (M&A) is commonplace and happening with extreme frequency. That was especially the case in 2015 with heavy 3PL and, in some cases trucking M&A activity.

But when it comes to freight railroad M&A the situation is not nearly as fluid or fervent for that matter. That is with good reason, too, specifically when one considers that there are fewer players to merger and acquire with, too, which is definitely the case with Class I railroads.

What’s more, the freight railroad sector has shrunk from 56 Class I railroads in 1975 to seven in 2005. And with such few players it makes the current situation regarding Canadian Pacific’s unsolicited nearly $30 billion offer to acquire Norfolk Southern interesting in that aside from CP, obviously, there does not appear to be a ton of public support for the proposed deal.

One example of that was found in a recent shipper survey by investment firm Cowen & Company, which found that 71 percent of surveyed shippers were not in favor of a CP-NS merger.

And with the current balance of power in North America among the Class I railroads––two in the east, 2 in the west, one in the middle, and 2 in Canada––an industry stakeholder recently told LM that has created a very stable playing field, but were one of the legs of this “table” to be pulled, it would require some sort of response among the other members of the supporting cast, which he said is not likely in their best interests.

With so few players and a lot on the line in terms of whether or not a CP-NS deal will actually ever come to fruition, it is clear that tensions are high either way. These deals are large and complex in terms of geography, assets, people, and service, among other factors, which makes it very difficult to make comparisons to large-scale deals in other freight transportation and logistics markets.