Wednesday, November 18, 2015

Regulators Could Stymie Rail Freight Giants North American Intermodal Freight and Logistics Dream

Collaboration Would Mean Unprecedented Sharing of Cargo Terminals
Shipping News Feature
US – CANADA – Canadian Pacific Railway (CP) known principally as a rail provider but which offers intermodal and logistics freight solutions, has sent an offer letter to Norfolk Southern (NS) to acquire the US based transportation company that would create a transcontinental railroad with the scale and reach to deliver what it says will be ‘improved levels of service to customers and communities while enhancing competition and creating significant shareholder value’. Just last year CP entered into merger talks with competitor CSX which ultimately failed after the two companies could not agree terms.

The proposal, which includes a sizeable premium in cash and stock offered to NS shareholders, could result in a company with the potential for faster earnings growth than either CP or NS could achieve on their own. CP proposed a 50% cash 50% stock transaction based on Friday 13th November's closing stock price for both CP and NS, in which NS shareholders would receive $46.72 in cash and 0.348 shares of stock in a new company which would own both of the carriers.

CP says it strongly believes that the combined railroad would offer unparalleled customer service and competitive rates that will support the success of the shippers and industries it serves, and satisfy the US Surface Transportation Board and Canadian regulators. Upon receipt of the offer, NS in a statement said:

“The Company's board of directors, in consultation with its financial and legal advisors, will carefully evaluate and consider this indication of interest in the context of Norfolk Southern's strategic plans, and its ongoing review of opportunities to enhance stockholder value through strategic, financial and operational measures and pursue the best interests of the Company and its stockholders.

“Notably, any consolidation among Class I railroads in North America would face significant regulatory hurdles. Norfolk Southern's board of directors and management team are committed to enhancing value for all stockholders.”

Among the combined company's key innovations is a new approach to terminal access that would change the status quo in US rail transportation. In the event the new company failed to provide adequate service or competitive rates, it would allow another carrier to operate from a point of connection over the combined company's tracks and into its terminals, providing an unprecedented alternative to the affected shipper.

In addition, the new company would apparently give shippers the choice of where they can connect with another railroad along its network, bringing an end to the practice of ‘bottleneck pricing’ to a large number of shippers in the US while further enhancing competition.

Furthermore, a combination would alleviate the long-standing issue of congestion in Chicago, which seized into gridlock in the winter of 2014 and hobbled economic growth. By channelling rail traffic away from Chicago, CP says it could create fluid routes through under-utilised hubs and free up much-needed capacity for other railroads that pass through the city, providing them with new, efficient and competitive service options for their own customers.

Talks at this point are at a very early stage and many things could change before closing, which CP has set a date for on December 31, 2017. Following the failed talks with CSX in October of last year, CP's CEO Hunter Harrison said that he remains open to mergers with other railroads but regulatory hurdles were a major deterrent to any future talks.