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December 7, 2015 3:15 AM, EST

Canadian Pacific Presses for Deal; Target Norfolk Southern Is Mum

Russ McNeil
This story appears in the Dec. 7 print edition of Transport Topics.

Two weeks after Canadian Pacific Railway Ltd. proposed a $28 billion combination with Norfolk Southern Corp., the prospective buyer continues to campaign for a deal, but there was no sign last week that one would materialize.

Hunter Harrison, CEO of the Canadian carrier, again laid out the case for an acquisition at a Dec. 2 investor meeting, while NS Executive Vice President Alan Shaw at the same session declined to discuss the offer made on Nov. 17.

In the industry’s first combination proposal since 1999, CP offered $46.72 in cash and 0.348 CP shares for each NS share, a price that NS earlier characterized as “low premium.” Combining the two companies would create a $17.6 billion-revenue business with more than $5 billion in operating income and a 34,000 route-mile system.

“We have a pretty good track record,” said Harrison, who has improved CP’s profit margin by 22.7 percentage points over three years since he became CEO, taking its operating ratio to 59.8 in the third quarter, or 10 percentage points better than NS. Before joining CP, Harrison married his Illinois Central Railroad with Canadian National Railway and engineered multiple acquisitions before departing in 2009.

Harrison still hasn’t said definitively when or whether CP intends to sweeten its offer or take the current proposal directly to shareholders for approval. The offer last week was worth about $96 per share. In the past 12 months, NS shares have traded as high as $112 and as low as $72.

Harrison did outline a series of cost-saving options to reach a target of $1.8 billion in annual savings if an acquisition occurred, including asset sales and job cuts.

“I don’t know of a railroad that doesn’t have too much physical plant,” he said, including his own carrier, whose Chicago area yard is adjacent to O’Hare Airport’s thriving business area.

On the job front, he noted that CP’s workforce has been reduced by almost one-third since 2012, mostly by attrition.

The CP executive also tried to dampen speculation that other railroads might oppose an NS acquisition as they did in 1999, when carriers such as Union Pacific objected to the combination of Canadian National and BNSF Railway, which was called off a year later.

“I can’t imagine Mr. [Warren] Buffett [whose Berkshire Hathaway firm now owns BNSF] going to Washington and saying these Canadians are going to do all these bad things to us,” Harrison said.

He indicated a mixture of shareholder support and other rails’ opposition, without giving details. He also discussed hypothetical scenarios, including CP executives moving to NS.

Meanwhile, all that Shaw would say about CP’s offer was, “I will not be making any comments.” Instead, he sketched steps NS plans to take to restore profit growth and normal service levels.

Through the first three quarters, Shaw said, a total of $932 million in fuel surcharges and lower coal revenue have led to an 8% decline in revenue. Earnings are 20% lower than last year over the period.

Shaw also sketched a fourth quarter that so far has resulted in a 4% drop in shipments, including 1 percentage point from discontinued intermodal business.

Steel, crude oil, sand and other shipments have been hurt by weaker manufacturing and the drop-off in fuel prices. Coal shipments have been further depressed by warm weather that has dampened electricity demand for home heating, he added.

Intermodal has been hurt by high inventories and lower fuel prices that have helped truckers secure business, he said.

However, he expressed optimism that intermodal and other businesses will be stronger next year.

“We are committed to improving shareholder returns,” he said. “We are very close to returning our service to levels customers expect,” he said, targeting the first quarter for an end to train delays and congestion.

“2015 was a transition year,” he said, with actions such as network, staffing and service adjustments that set the stage for a better 2016.