By Kevin Belanger,
International Business Writer
Today there are only seven Class I Railroads in the United States and Canada, making it a very concentrated market. These seven railroads own all of 95,000 miles of Class I track in the United States. However, according to Reuters, the Canadian Pacific Railroad reportedly is considering the possibility of purchasing the Norfolk Southern Railway. The Financial Post reports that Canadian Pacific may be able to augment its largely east west network of rail with Norfolk Southern’s high concentration of rails running into the Southeastern United States. According to CBC Canada, the deal would also give Norfolk Southern access to rail in the western United States, where it currently does not have any track. Currently, Canadian Pacific does not have tracks south of Kansas City. Another motivation for the deal could be the immense rail congestion in Chicago, a major hub for both Canadian Pacific and Norfolk Southern. Canadian Pacific’s Chief Executive Officer Hunter Harrison believes that congestion could be alleviated in Chicago if it could merge its operations with Norfolk Southern.
If this deal were to be successful, it would be the second largest deal in North American Railroad history. The deal would be worth 24 billion dollars, second only to Berkshire Hathaway’s decision to purchase Burlington Northern in 2009, the New York Times reports. This deal follows Mr. Harrison’s ultimately fruitless effort to purchase CSX in 2014. In his time in the industry, Harrison has been responsible for increasing rail road efficiency as well as completing several major deals to consolidate the industry in North America. Speaking about the railroad industry, Harrison stated that consolidation was an inevitability in the industry, according to the Financial Post. While Norfolk Southern is larger than Canadian Pacific, by both track owned and net income, Norfolk Southern’s business has suffered due to low commodity prices. Neither company made a public statement about the details of the deal.
Investors in both the United States and Canada were clearly happy with the news when it broke on Nov. 9. The New York Times reports that Norfolk Southern stocks rose 11 percent upon news of the rumored deal. Likewise, Canadian Pacific stock rose 5.9 percent upon news of the deal.
While investors were apparently pleased with the idea of the merger, industry experts and analysts warned that the deal would face enormous obstacles. Since Norfolk Southern is considered a strategic asset, United States regulators would have to weigh in on whether a foreign company would be allowed to own it. The high concentration of the railroad industry also presents a challenge in getting the deal approved. The Financial Post reports that no major deal between railroads has been completed in North America since 2000. Mike Ward, the CEO of CSX, stated that further consolidation in the industry would actually create more congestion and delays in the industry. Several analysts flatly stated that deals to further consolidate the industry were simply not worth considering. Allison Landry, an analyst for Credit Suisse, stated that the Surface Transportation Board, the United States agency responsible for regulating railroads, simply would not allow such a deal to occur. Another analyst, Benoit Poirier reported to clients that the deal would be immensely positive for investors but that investors should not expect the deal to happen any time soon. Reuters also reports that shippers would most likely oppose the deal due to fears of changes in shipping prices.
A version of this article appeared in the Tuesday, November 17th print edition.
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