Canadian Pacific Said to Explore Norfolk Southern Takeover

Ariana Lindquist/Bloomberg News

Canadian Pacific Railway, the second-largest railroad in Canada, is exploring a takeover of U.S. carrier Norfolk Southern Corp. in a fresh attempt to consolidate the North American industry, according to people familiar with the matter.


Canadian Pacific is raising financing and has held early-stage merger talks with Norfolk Southern, which is valued at about $24 billion, said two of the people, who asked not to be identified because deliberations are private. Discussions are preliminary and talks may not progress or lead to a deal, they said. Representatives for Canadian Pacific and Norfolk declined to comment.


Norfolk Southern surged as much as 14%, the biggest intraday gain since 2001, while Canadian Pacific increased as much as 7.5% in Toronto. The Standard & Poor’s 500 Railroads Index, which tracks four U.S. carriers, rose as much as 5% to erase an earlier drop.


A move for Norfolk Southern, the second-biggest railroad in the eastern United States, would revive Canadian Pacific’s effort to build a transcontinental carrier after talks with CSX Corp. failed last year. In floating the idea of a CSX tie-up, Canadian Pacific CEO Hunter Harrison upended the long-held view in the industry that it was fruitless to even discuss another merger because regulators would object.


Dealmaking since U.S. railroad deregulation in 1980 has shrunk the number of major U.S. carriers to four alongside Canadian Pacific and Canadian National Railway Co. But Harrison, 71, is a veteran of past rail mergers and has led an operational turnaround at Canadian Pacific since being lured out retirement in 2012 by activist investor Bill Ackman, whose Pershing Square Capital Management is the biggest shareholder. The railroad’s market value was about C$27 billion ($20 billion) as of Friday.


Harrison previously ran Canadian National, where he spearheaded the 2007 agreement to buy Elgin, Joliet & Eastern Railway Co. He was CEO of Illinois Central Corp. when Canadian National agreed to buy that carrier in 1998 in a transaction valued at about $3 billion.


Norfolk Southern operates about 20,000 route miles of track snaking through 22 eastern states and serves each of the region’s major container ports. Its connections with western railroads include Chicago and Kansas City, Missouri — two cities served by Canadian Pacific.


Canadian Pacific’s network spans southern Canada from Montreal to Vancouver and turns south to cut across the U.S. grain belt in the Dakotas, Minnesota and Wisconsin before connecting to the rail hub of Chicago.


The railroads’ cargo markets are complementary. Intermodal shipments — goods in containers that can be hauled by ship, rail and truck — made up 22% of Norfolk Southern’s $11.6 billion of 2014 revenue, followed by coal with 21%. Autos and auto parts contributed about 9%.


Canadian Pacific’s biggest shipping category by revenue was industrial and consumer products, at 28% of last year’s C$6.62 billion of revenue.


The stocks of both companies had been falling this year amid declining shipping volumes, due in part to drops in cargo such as coal and oil. Canadian Pacific fell 20% this year through Friday. Norfolk, Virginia-based Norfolk Southern declined 27% in that span.