A takeover of Norfolk Southern Corp. by Canadian Pacific Railway Ltd. would give Hunter Harrison his dream: a railway that reaches three coasts.
The chief executive officer of Calgary-based CP could be a step closer to achieving that goal, after he tried and failed to buy CSX Corp. last year.
Shares in Norfolk Southern soared by as much as 13 per cent on Monday after Bloomberg reported that CP was raising money for a possible deal with Virginia-based Norfolk, citing unnamed sources.
CP investors cheered the possibility of a deal, sending up the shares by more than 6 per cent. The takeover would give CP coveted access to ports on the Gulf Coast and Atlantic Ocean, along with 20,000 miles of rail in 22 states, mainly in the U.S. South, East and Midwest.
Spokesmen for Norfolk Southern and CP would not comment.
Norfolk Southern, which has a market value of $26.5-billion (U.S.) and 29,000 employees, operates in the same territory as CSX.
Last year, CP abandoned talks with CSX after it became clear that the Florida-based company was not interested. The CSX deal would have given CP direct access to major U.S. refiners in the eastern part of the the country, linking with its own network, which encompasses the West Coast and the oil-rich Midwestern parts of the United States and Canada, but halts at Montreal.
By comparison, Canadian National Railway Co., CP's Montreal rival, has a railway that reaches ports on the East and West Coasts in addition to the Gulf of Mexico.
Benoit Poirier, an equities analyst with Desjardins Capital Markets, noted that CN's superior network was assembled when Mr. Harrison was at the company. Since taking control at CP in 2012 after a boardroom battle led by activist investor Bill Ackman, Mr. Harrison has made strides to improve CP's efficiency and profitability. Building a better rail network and applying his operational model to the underperforming Norfolk Southern, Mr. Poirier said, could be next on his to-do list.
Railway leaders and observers in the industry have said the U.S. Surface Transportation Board would be reluctant to approve rail mergers at a time when complaints about rail congestion and service are high. After blocking a merger between CN and Burlington Northern Railroad in 2000, the U.S. regulator toughened its rules and said any merger must improve service, not merely preserve it.
However, Mr. Harrison never abandoned his belief that rail mergers would help to relieve the congestion that grips the industry, particularly in Chicago, where the big carriers hand over railcars to each other. He has said a merger would improve service, efficiency and capacity, but "nobody wants to do a deal."
Mr. Poirier highlighted some of the service improvements a merger could bring, including offering oil shippers in the Bakken and oil sands direct access to refineries on the U.S. East Coast. And the combined companies could offer a "unique" route for intermodal containers to Florida from Vancouver.
"By bundling two companies like that, you would really make the Chicago bottleneck easier," he added by phone.
Walter Spracklin, an analyst with Royal Bank of Canada, said the possible deal makes "quite a bit of operational and financial sense," but it would face a tough fight to win approval by U.S. regulators.
"Though there would be minimal geographic overlap in this transaction, we believe shippers would be extremely vocal against a merger due to concerns over service and pricing," he said.