CP’s bid for American railway faces bar set high by regulator
In 2001, U.S. regulators imposed a seemingly insurmountable condition on big railway mergers: A deal not only must preserve competition, but actually improve it. This may seem laughable at first glance. How often does a combination of two companies result in more competition, after all?
But as Canadian Pacific Railway Ltd. details its US$28.4-billion proposal to acquire Virginia-based Norfolk Southern Corp., analysts and the company itself are saying the hurdle is high, but not impossibly so.
“Is it possible? Sure, but there would have to be a lot more flesh on the bones (of the deal) for it to actually get approved,” said one prominent U.S. rail lawyer who asked not to be named because he’s not authorized to speak to the media.
On Wednesday, CP released the letter that CEO Hunter Harrison sent to his counterpart at NS, Jim Squires, following a face-to-face meeting between the two executives last week.
In it, Harrison says the cash-and-stock deal would create “an integrated transcontinental railroad with the scale and reach to deliver unsurpassed levels of safety and service to our customers and communities while also increasing competition and creating significant shareholder value.”
With his talk of “increasing competition,” Harrison is clearly trying to win over the U.S. Surface Transportation Board (STB).
In announcing the offer, CP said the combined company would allow shippers greater choice of connections with other railways along its network, and would allow another railway to operate on its tracks and into its terminals if the combined CP-NS “failed to provide adequate service or competitive rates.” It also said a deal would help alleviate congestion in Chicago — a major rail choke point — by channelling traffic away from the city.
These concessions will help, but may not be enough to convince the STB to approve the deal, said the rail lawyer.
“A lot will depend on the reaction of other players, including the other railroads,” he said.
Since the STB imposed a temporary moratorium on mergers in 2000 and came out with its new rules in 2001, no successful deals have been completed between Class 1 railroads, of which there are only seven in North America.
Part of the reason is the longheld assumption that one merger would prompt others, and if left unchecked, the North American rail industry could quickly shrink from seven big players to two.
And it’s not just the other railways that the STB will have to contend with — it’s all the other stakeholders too, including labour and shippers.
“Any time you open a merger in this business, it’s open season for anybody and anyone who has an issue with railroads to try to get their pound of flesh,” Tony Hatch, principal at railway consulting firm ABH Consulting, said in an interview.
“They can make a deal that the STB would approve; the open question is, is that deal worth it?”
Any deal would also have to be approved by Canada’s transportation minister. Although there wouldn’t be the same competitive concerns, since NS has a very small presence in Canada, the headquarters of the combined company could be a sticking point, Hatch said. CP is based in Calgary.
First, though, CP will have to convince NS shareholders that the deal is in their best interest. The company said it will evaluate the offer but was distinctly unenthusiastic, calling it “low-premium” and saying it would face “significant regulatory hurdles.”
Shares in both companies jumped on the news.
RBC analyst Walter Spracklin said he believes “a hostile takeout is not an option,” and CP hopes to pressure the board to respond formally and possibly to encourage shareholder pressure.
Is it possible? Sure, but there would have to be a lot more flesh on the bones (of the deal) for it to actually get approved.