Rumoured rail merger could face bumpy ride

Financial media have reported that Canadian Pacific may make a move on Norfolk Southern, but analysts see regulatory hurdles ahead. (Neale Clark / robertharding/REX Shutterstock)

TORONTO (ICIS)–A rumoured bid by Canadian Pacific Railway (CP) for US rail carrier Norfolk Southern would likely face stiff regulatory hurdles, analysts said on Tuesday.

The combination would result in a rail network, controlled by one company, that stretches from western Canada to the US Gulf and Atlantic coasts.

A CP executive, speaking at a conference in Toronto on Tuesday, said that consolidation in the North American rail sector would improve customer service through a more streamlined network. However, he would not confirm talks with Norfolk Southern.

CP did not return a call on Tuesday requesting comment on any merger move which, although widely reported in the Canadian and US financial press, has yet to be taken public.

In a brief statement issued last week in response to a request by a Canadian stock market regulator, CP said that there was “no material news pending” and that it would not comment on market rumour or speculation.

Analysts said that the North American freight rail sector is already highly consolidated with only seven carriers accounting for the bulk of shipments. Thus, further consolidation would pose a significant regulatory hurdle, they said.

CP, in a previous regulatory filing, listed six carriers as major competitors: BNSF Railway, Canadian National, CSX Corporation, Kansas City Southern Railroad, Norfolk Southern and Union Pacific.

Furthermore, Norfolk Southern’s management seems “cool” toward CP’s approach, the Wall Street Journal and other media reported, citing financial market sources.

Some analysts have linked CP’s bid to the US government’s official rejection earlier this month of the Keystone XL oil pipeline project from Alberta. With tight North American oil pipeline capacities, that rejection should further increase the role of crude-by-rail which has become a key business for CP and other rail carriers in recent years, they said.

Any consolidation in the freight rail sector would inevitably affect the chemicals and fertilizer industries, given the role of rail in the shipment of chemicals and fertilizers.

Railcar loadings represent about 20% of US chemical transportation by tonnage. In Canada, chemical producers rely on rail to ship more than 70% of their products, with many relying exclusively on rail.

According to the latest industry data, US chemical loadings for the period from 1 January to 7 November 2015 were up 0.5% to 1,334,073. In Canada, loadings were up 1.8% to 507,860 over the same period.