Canadian Pacific Norfolk Southern Merger

[kgbw49]

One opinion - Given that STB rules require that a future merger must have the effect of increased competition, and the fact that about 2/3 of the US population lives east of the Mississippi, and that it is unlikely that either the Canadian or US governments will ever allow foreign ownership of such a critical segment of economic infrastructure, the only way things change east of the Mississippi is if the two Canucks and two Western roads buy out both NS and CSX and divide them amongst the four of them, resulting in four major railroads competing east of the Mississippi.

There would likely have to be a lot of joint trackage, such as BNSF and CP co-owning the former NS main lines from Chicago to New York, and UP and CN co-owning the former CSX main lines from Chicago to New York, for example.

Right now there is a Class 1 duopoly in the eastern US. Changing the names on the duopoly does not increase competition - it is still a duopoly.

The only way to increase competition in the eastern US is to go from two Class 1 railroads competing in the territory from Boston to Chicago to New Orleans to Jacksonville up to either three or four Class 1 railroads competing in that territory.

Yes, it would be quite a task to figure that out, just like with the Conrail acquisition that resulted in going from a monopoly to a duopoly in the northeast US. But it has actually been done in the recent past.

Again it is just my opinion, but unless BNSF, CN, CP, and UP come walking together up the steps of the STB with a plan to buy and divide the two eastern Class 1 roads amongst the four of them, I don't see anything else getting approval.

(One other note - I seem to remember reading articles back when the merger rules were rewritten that an acquisition of KCS would not be subject to the new rules, so dakotafred's suggestion of CP-KCS might be more feasible from a regulatory standpoint.)

 

 

 

 

 

 

[dakotafred]

Given the "and that goes for your horse, too" tone of Squires' rejection, I'd be surprised if further overtures from CP were forthcoming.

Maybe now EHH can get after what should have been his objective all along: KCS. He was interested in it once, in his days at the IC. It makes even greater sense for CP, balancing CP with CN down South and putting it into Mexico besides.

[schlimm]

Norm48327

 

 

schlimm

 

 

Andrew Falconer

Canadian Pacific is so weak that all they would do is run the Norfolk Southern to a bone bare money losing operation.

 

 

 

 

Hardly.

NSC operating ratio for 3rd quarter 2015 (Oct. 28) = 69.7 percent.

CP operating ratio for 3rd quarter 2015 = 59.9 percent.,

 

 

 

 

I don't believe it is as simplistic as that. There are many more factors to consider.

 

Norm:  When Mr. Falconer makes such a foolish statement as he did, it is simple to demonstrate the falsehood.

[Norm48327]

schlimm

 

 

Andrew Falconer

Canadian Pacific is so weak that all they would do is run the Norfolk Southern to a bone bare money losing operation.

 

 

 

 

Hardly.

NSC operating ratio for 3rd quarter 2015 (Oct. 28) = 69.7 percent.

CP operating ratio for 3rd quarter 2015 = 59.9 percent.,

 

I don't believe it is as simplistic as that. There are many more factors to consider.

[schlimm]

Andrew Falconer

Canadian Pacific is so weak that all they would do is run the Norfolk Southern to a bone bare money losing operation.

 

Hardly.

NSC operating ratio for 3rd quarter 2015 (Oct. 28) = 69.7 percent.

CP operating ratio for 3rd quarter 2015 = 59.9 percent.,

[Victrola1]

Other than that Mrs. Lincoln, how did you like the play?

dakotafred

Other than that, what do you think of the merger, Mr. Squires?

 

[dakotafred]

Other than that, what do you think of the merger, Mr. Squires?

[Ulrich]

BaltACD

 

Ulrich

CP responded to the NS decision a few minutes ago. It looks as if CP will not give up so easily. They say more clarification will be provided on Tuesday. Hunter has more grit and determination than most CEOs.. I wouldn't count him or CP out just yet.

 

 

What will be the next offer point?  How much higher?  While Hunter may believe in himself, does the investment community believe in CP ownership of NS?

 

BaltACD

 

Ulrich

CP responded to the NS decision a few minutes ago. It looks as if CP will not give up so easily. They say more clarification will be provided on Tuesday. Hunter has more grit and determination than most CEOs.. I wouldn't count him or CP out just yet.

 

 

What will be the next offer point?  How much higher?  While Hunter may believe in himself, does the investment community believe in CP ownership of NS?

 

 

I don't know. Personally (looking from the outside in) I thought Jim Squires' response had merit. At least I don't see where the cost savings and efficiencies would come from or how the Chicago bottleneck would be addressed. But maybe Harrison will clarify that on Tuesday. The investment community seems to believe in mergers.. but these people are also for the most part not close enough to the action to make an educated determination as to the real merit of any merger. I guess we shall see..

[Andrew Falconer]

Canadian Pacific is so weak that all they would do is run the Norfolk Southern to a bone bare money losing operation.

[BaltACD]

Ulrich

CP responded to the NS decision a few minutes ago. It looks as if CP will not give up so easily. They say more clarification will be provided on Tuesday. Hunter has more grit and determination than most CEOs.. I wouldn't count him or CP out just yet.

What will be the next offer point?  How much higher?  While Hunter may believe in himself, does the investment community believe in CP ownership of NS?

[Ulrich]

CP responded to the NS decision a few minutes ago. It looks as if CP will not give up so easily. They say more clarification will be provided on Tuesday. Hunter has more grit and determination than most CEOs.. I wouldn't count him or CP out just yet.

[jrbernier]

  I suspect that EHH's time at CP may be ending shortly.  The investment fund hired him to 'cut & slash' CP to profitability.  He has done a good job, the there is not a lot more that can be cut at CP.  And CP really needs to do a massive signal/signaling upgrate to both the western Canada, and domestic SOO/MILW properties - and there is no capital to do this with.

  He was appointed the 'front man' to drive the CP-NS merger, and I suspect that will never happen(at least at the cost he was projecting).  He is 71 or 72, he should be looking at retirement...

Jim

[BaltACD]

NS rejects CP offer.

http://www.usatoday.com/story/money/2015/12/04/norfolk-southern-rejects-canadian-pacific-transcontinental-railroad-deal/76771760/

[jeffhergert]

CSSHEGEWISCH

A hostile takeover might be possible but it would be expensive, think back to the takeover mania of the 1980's.  It might also leave the surviving corporation in poor financial shape.

 

That's OK, as long as the largest investors can make their money then get out.  So the remaining company is weakend, the small investors not doing as well.  No one really cares, except the people who's jobs depend (directly or indirectly) on the company and the small investors left holding the bag.  They usually don't count.

On another site I read an interesting thought.  That EHH may be trying to signal to NS that he might be available to help them out after his CP tenure is up.  Pure speculation, but food for thought.

Jeff 

[Ulrich]

I don't think anyone wants to be the "pioneer" in this next round of mergers. Who ever goes first will need to test and overcome the regulatory hurdles and subject their shareholders to protracted uncertainty and unknown cost and conditions that may or may not result in a better combination five or ten years hence. Once the path is cleared, whoever goes next will have a much easier time and may even be encouraged by the regulators in order to maintain competitive equilibrium.

 

It may be advantagous for all the major systems to get together in order to work out the final system of two or three railroads. They can then present that to the TSB as a group, showing benefits to shippers, shareholders, and the general public.

[Dakguy201]

CSSHEGEWISCH

A hostile takeover might be possible but it would be expensive, think back to the takeover mania of the 1980's.  It might also leave the surviving corporation in poor financial shape.

 

 

There has always been an element of the minnow swallowing the whale to this deal.  NSC has a market cap of $26.7 billion while CP is $20.8 bil.  

 

As we are seeing with the Pfizer deal, there is political heat to be faced for taking an American company offshore and gaining tax relief.  Combine that with a historical dim view of large mergers, and I just don't believe regulatory approval will ever be obtained in this country.

 

As a (modest) NSC stockholder I'm more than willing to wait for a more sensible and realistic offer.

 

[schlimm]

Victrola1

 Takeover wars seem to have lost their sizzle. What happened to the battles of corporate goliaths? Where have they gone, those swaggering deal makers? "Harriman vs. Hill" is a corporate dust-up that takes us back to the beginning of the 20th century, when tycoons who traveled by private rail merrily raided each other's empires while the world around them cringed.....

http://www.wsj.com/articles/SB10001424052702303496804579369203810705602

Is there any chance of Harrison at CP launching a hostile take over attempt? 

 

 

In the Bloomberg interview, Harrison seemed prepared to go to NSC shareholders directly.  Given their dissatisaction with NSC management, it is quite possible he would succeed.

[CSSHEGEWISCH]

A hostile takeover might be possible but it would be expensive, think back to the takeover mania of the 1980's.  It might also leave the surviving corporation in poor financial shape.

[Victrola1]

 Takeover wars seem to have lost their sizzle. What happened to the battles of corporate goliaths? Where have they gone, those swaggering deal makers? "Harriman vs. Hill" is a corporate dust-up that takes us back to the beginning of the 20th century, when tycoons who traveled by private rail merrily raided each other's empires while the world around them cringed.....

http://www.wsj.com/articles/SB10001424052702303496804579369203810705602

Is there any chance of Harrison at CP launching a hostile take over attempt? 

 

[wanswheel]

Probably moot now, excerpt from Credit Suisse webcast transcript

http://www.cpr.ca/en/investors-site/Documents/CS-Transcript.pdf

ALLISON LANDRY

Since then it was a couple of weeks since we’ve heard from you last. Has there been any discussion with either Squires, or you know, (unclear). I’m sure you’ve been talking to shareholders.

HUNTER HARRISON

Oh yeah, I mean there’s -- I think that our friends at NS have indicated that we’d be receiving a response from them I think soon. So I think we will hear from them…

[oltmannd]

http://www.nscorp.com/content/nscorp/en/news/norfolk-southernboardofdirectorsunanimouslyrejectsunsolicitedind.html

A very fancy, detailed and wordy, "No, thanks!"

[schlimm]

NSC stock dropped over 6% early Friday on news of rejection of CP bid and shareholder lack of confidence in Squires' probability of cost-cutting in 2016.  

 

[Victrola1]

Norfolk Southern Corp. has rejected Canadian Pacific Railway Ltd.’s unsolicited acquisition offer, valued at over $28 billion, saying the tie-up undervalues the company and is unlikely to be cleared by regulators.

In a news release, Norfolk Chief Executive James A. Squires said there was a “high probability” that the deal would be rejected by the U.S. rail-industry regulator, the Surface Transportation Board.

http://www.wsj.com/articles/norfolk-southern-rejects-canadian-pacifics-offer-1449232264

 

[schlimm]

The stock dropped 1.56%

[Victrola1]

CSX Lowers 2015 Earnings Outlook

 

4/15/2015 11:45 PM ET

Railroad operator CSX Corp. (CSX) on Wednesday lowered its earnings forecast for fiscal 2015, noting that coal headwinds have increased for the remainder of the year.

http://www.rttnews.com/2482857/csx-lowers-2015-earnings-outlook.aspx

Next?

 

[wanswheel]

These are the questions Allison Landry of Credit Suisse asked EHH on the webcast yesterday. 

http://www.cpr.ca/en/investors/credit-suisse-industrials-conference

Question: Thank everybody for coming. Good afternoon. Very excited to have Canadian Pacific here with us today, and CEO, Hunter Harrison. So, we'll just dive right into the Q&A. Hunter, first, I was wondering if you could give us a brief overview of your rationale and thoughts on the proposed transaction or combination with Norfolk.

Question: It's been [close to a] couple of weeks since we've heard from you last. Has there been any discussion with either (inaudible) acquirer or (inaudible) groups? I'm sure you've been talking to shareholders.

Question: Thinking about the CAD1.8 billion that you outlined in terms of synergies, you've publicly spoken about the bulk of that coming from operational improvement. I guess, how do we think about -- what portion of that CAD1.8 billion would ultimately come from revenue synergies from the single haul rail? How do we think about sort of breaking that number down in terms of cost improvement versus driving more business to the rail?

Question: Got it. And thinking about -- going back to one of your earlier comments that -- where some -- one of the places you're hearing opposition from are some of the other rails, if you think about the mergers of the past, and sort of all the trackage rights, and everybody sort of wants something out of supporting the deal, is that factored into the CAD1.8 billion in terms of mitigation costs?

Question: And in terms of what the other rails could oppose, have you heard any feedback or commentary? Would it be, for example, grain that you're moving with BN now to somewhere in the Gulf -- like, that goes CP/NS. And that's just an example; but is that something that you would anticipate the other rail sort of crying foul about?

Question: Do you think that the proposals that CP has suggested -- and I know that it's specific to the CP/NS transaction in terms of the terminal access and removal of bottleneck rates and paper barriers -- is that, in your view, what your competitors will sort of go after, out of fear of not being able to raise price and the –

Question:  On the topic of paper barriers, I think in one of your books you talked about the importance of the short-line industry. And obviously we've seen in the US a lot of consolidation, Genesee & Wyoming having about 25%. Is there any opportunity at any of the sort of terminals, where there would be terminal access granted that you could use a short line instead of Brand X, for example? And would that potentially lower costs for switching?

Question: Thinking about -- and you talk a little bit about head count reduction at Norfolk, and it's not your prerogative to go in there and basically tell them you're cutting jobs, but it would be done through attrition. I wanted to ask two questions within that context. First, what are the sort of union protections that are available to US employees? And then, second, does  NS to your knowledge have sort of a similar base of contracted employees, similar to what you initially found at CP? Were you able to reduce head count from that -- from the non-union perspective? Is there any similarities or parallels we can draw?

Question: Got it. Any questions from the audience?  Unidentified Participant (Inaudible) talked about CP's CapEx going to be slightly lower, the next 3 years (inaudible) million. If I look at CapEx in the Class I rails, it's been tracking to pricing, which is well ahead of inflation. So, it's not tied to miles. It's not tied to inflation. It's tied to their own pricing. You gave the CAD1.8 billion synergy number in operations. Is there a synergy number on CapEx as well? And are the Class I [rails] just generally spending more CapEx than necessary? Is there a savings there? Thank you.

Question: Could we talk a little bit about what you mentioned a couple of weeks ago, in terms of the way that the voting structure would work? And I believe you mentioned the possibility of a holding company. How would that work within sort of the confines of a voting trust? If you, for example, were to lead the holding company, would that be before STB approval, or after? How would that work?

Question: How have shareholders responded to your proposal, and there's certainly a lot of cross-ownership in the industry, and I think that you had mentioned that as being a potential sticking point. Has that come up again from your discussions, the last couple of weeks?

Question: Any questions? Quiet out there. Hunter, one of the things that you mentioned also was the potential for land sales at Norfolk. How should we sort of think about that? Is it sort of similar to what's unfolding at CP currently, in terms of monetizing assets? How do you think about the free cash flow implications of that?

Question: Hunter, can I squeeze in a fundamental question on CP? Just because we've heard from some of the other rails this morning, and obviously volumes have taken a step down. CP's somewhere in the middle of the pack. Do you think you can overcome the volume weakness in the quarter?

Question: The point is, the business is operating very well, and at some point we'll see a pop in the economy, and from there it's –

Question: Any final questions? All right. Hunter, thank you so much for your time.

[Victrola1]

Talk to the bank. 

If this goes through, it makes one wonder how leveraged the deal will be.  

[wanswheel]

http://www.cpr.ca/en/investors/cp-ceo-to-address-credit-suisse

[oltmannd]

zugmann

 

 

oltmannd

I don't think so. NS doesn't need autorouter/movement planner to centralize. Just having UTCS is enough. Any desk can be dispatched from any other desk on the system right now. But, NS's whole operations managment is decentralized to a greater degree than on other roads. Most places, whether to run an extra or annul a train is made by a central office. On NS, these decisions are made at the division level - sometime to the detriment of the network as a whole. That would have to change before you'd see consolidated distpatch offices.

 

 

 

UTCS without autorouter required people to run the system.  With autorouter enabled, not as much.  I think that will be the key to consolidation (if it ever gets to the point of running the railroad unencumbered).  And you know many of those decisions made at the division level used to be made at the local level.  It's heading in that direction already.  CYO/OSS now handles all customer issues - many of which were at one time local decisions.  Writing's on the wall.

 

I could be wrong, but I would be surprised.

 

 

 

 

 

 

I hope you are wrong, but suspect you have a point.  Looking at UTCS w/autorouter as a vehicle to reduce headcount in the division office should be WAY down on the priority list of things "to do", but....

[noemdfan]

Murphy Siding

Harrison's Operational Mode is to run trains on a tight schedule.  Container traffic is the commodity that you want to keep on a reliable schedule.  If you can beat the competition (usually trucks), you can win the service.  Now if you're just delivering to Chicago, that's not a problem, until you consider a water-level route like the old Illinois Central from New Orleans into Chicago.  Less fuel would be used (both by container ship and train) from Asia to Chicago by New Orleans than by Montreal.  So there is no market growth there.

If you going through Chicagoland to Kansas City, Milwaukee or Minneapolis, and you can't get a train through Chicago, how in the heck could a schedule be kept?  That's problem #1.

Problem #2 is The Detroit-Windsor Tunnels, which are currently only single stack capable.  Harrison can fix problem #2, but without fixing problem #1, it's a waste of Capital Dollars. 

Technically, CP can run around Lakes Huron and Superior to fix problem #1, bypassing Chicago, but the line generates little on-line traffic.  And it's the long way into Chicago, Milwaukee, Minneapolis or Kansas City, via Thunder Bay, Ontario.  Think of the line around the north side of the Great Lakes as a VERY LONG BRIDGE, getting you from one side of where traffic is generated to the other side, but generating no revenue (kind of like the D&H).  So the traffic producing parts of the railroad have to pay for a line that connects them. 

In the long run, that's no way to be efficient.  EHH, Ackman and CP need a line that generates traffic over every mile and they want to cut anything that doesn't (say goodbye to the D&H).  If they can ever get to scheduling Double-Stack trains from Montreal, through Toronto, Mississauga, Windson, Detroit, Chicago, Milwaukee and Minneapolis or Kansas City, they'll make real money (and dump the North Shore route).

Now with that being said, either CSX or NS allows Harrison to get through Chicagoland on a schedule.  And remember, he said that he'd trade "open access" for any merger.  EHH and Bill Ackman NEED control of the Indiana Harbor Belt to get their trains through.  That means CSX or NS who each own 25.5% of it. 

Also, from a blog post I wrote https://www.blogger.com/blogger.g?blogID=1158766641710713668#editor/target=post;postID=1000680567962151355;onPublishedMenu=posts;onClosedMenu=posts;postNum=2;src=postname, CP's piece of the intermodal container freight pie is limited as to the markets that they serve.  With the opening of the new PanaMax Lane of the Panama Canal, it will be cheaper to ship containers to the East Coast of the US and have trains to Market Cities (e.g. Atlanta, Cincinnati, Kansas City, Dallas, etc.) docked on an Atlantic Ocean port and shipped to a market in that region than shipping containers transcontinentally by rail.

 

wanswheel

Excerpt from The Globe and Mail, Nov. 9

http://www.theglobeandmail.com/report-on-business/canadian-pacific-said-to-explore-norfolk-southern-takeover/article27176306/

Benoit Poirier, an equities analyst with Desjardins Capital Markets, noted................................ 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.................... 

 

 

 

 What is Harrison's operational model that is so different from everybody else?