Norfolk Southern is known as a ‘railroader’s railroad’ with a strong southern culture that is unlikely to welcome a takeover.Luke Sharrett/Bloomberg
Canadian Pacific Railway Ltd.'s reported plan to create the largest railway in North America with an offer for Norfolk Southern Corp. would face a lengthy review process that could pit the company against shippers unlikely to welcome less competition.
CP's takeover of Virginia-based Norfolk Southern would form a railway with more than 33,000 miles (about 53,000 kilometres) of track that reach the key ports of Vancouver, New York and New Jersey, in addition to the oil patch and the refineries in the Eastern United States.
If the deal goes ahead, CP will be transformed from a railway whose biggest business is grain into one with greater exposure to service-oriented industrial and consumer goods, in addition to the dwindling business of coal.
CP and Norfolk Southern say they are not commenting on market speculation.
But before any deal can happen, it must undergo the scrutiny of the U.S. Surface Transportation Board and the Canadian Transportation Agency in addition to foreign investment reviews, which could take two years.
The regulators will want to hear from the stakeholders that will be affected by any merger, chief among them the companies that rely on railways to move their goods. These shippers are not expected to welcome the loss of another railway, after enduring several years of rising rates, congestion and deteriorating service, analysts say.
"Every single time there is a merger of two large companies, like airlines, people are concerned about less competition and poorer service and higher pricing," said Gregory Pau, an analyst with DBRS.
Industry associations representing miners, coal companies and oil producers in Canada and the United States declined to comment or did not respond to interview requests.
Railway mergers are unlike most others. Combining two companies whose tracks do not overlap means there are no easy savings to be had by simply closing factories and eliminating duplication. For the people who operate the railways, the bigger expanse of track brings the chance to offer more lucrative longer-haul service to customers, and fewer interchanges with other rail companies, a time-consuming and revenue-sapping measure.
Anthony Hatch, a transportation analyst and founder of New York-based ABH Consulting, said support from rail customers will be vital if any merger is to pass the "complicated" approval process involving several jurisdictions.
But he predicted reaction from shippers will range from "neutral and sullen" to "actively opposed" to this and any other proposed union that emerges.
Benoit Poirier of Desjardins Capital Markets says the approval process could take longer than two years, but that the companies should be able to show the combination will be good for shippers. He noted there is little overlap in the companies' routes, and that they would offer longer hauls for oil, auto products and intermodal containers, potentially reducing costs.
Today, there are just seven major rail carriers in North America. BNSF Railway Co. and Union Pacific Corp. operate in the United States west of the Mississippi; CSX Corp. and Norfolk Southern compete in the east. Canadian National Railway Co.'s lines span Canada and extend south to the Gulf of Mexico while CP's run from Vancouver to Montreal, and down into parts of the U.S. Midwest. The smallest carrier of the seven, Kansas City Southern, runs from Kansas City deep into Mexico.
The Staggers Act of 1980 deregulated much of the U.S. railway industry, allowing shippers to negotiate better freight rates and enjoy more route choices. The law also touched off a flurry of railway mergers as companies sought to slash costs, boost efficiency and eliminate unneeded lines.
But by 1994, mergers had reduced the number of large railways to seven from 33. Shipping rates began to creep higher, in tandem with complaints about congestion and long wait times for rail service.
By 2000, the Surface Transportation Board had seen enough. It ended the proposed merger of CN and Burlington Northern Santa Fe, as it was then called, with a 15-month moratorium and began requiring railroads show any merger would improve service, not merely preserve it.
Recently, railways in Canada and the United States have been hauled before regulators to account for their lousy service, particularly in the grain business.
From a railway standpoint, Mr. Hatch sees a few key reasons the merger is a bad idea, including the risk that regulators will impose conditions that will trump any financial gains the takeover will bring.
Norfolk Southern, he said, is known as a "railroader's railroad" with a strong southern culture that is unlikely to welcome a takeover.
"Norfolk Southern is likely to fight this," Mr. Hatch said.
He noted CP chief executive officer Hunter Harrison is not known for "diplomacy and tact" in his dealings with regulators and shippers, characteristics that might not help with any approvals.
However, Mr. Harrison is a well-regarded railroader who built CN's superior network and transformed CP from an industry laggard into a lean company that posts record profits and is adored by investors.
"Never underestimate Hunter Harrison and friends of his," Mr. Hatch said. "I have learned that betting with him makes a lot more money than betting against him."
Canadian Pacific Railway (CP)
Close: $182.43, down $3.35
Norfolk Southern (NSC)
Close: $88.89 (U.S.), up 32¢
Eric Atkins