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CP+NS Is Over... Maybe

On Monday of last week, Canadian Pacific (CP) ended its effort to take over Norfolk Southern. If you are a regular reader of this blog, you know this is not how I expected it to end. I have previously noted that CP and its CEO Hunter Harrison were a determined bunch and very meticulous in their approach. The latest was to be an all-out effort to convince NS shareholders to vote in favor of the merger. What I expected was that the merger application would, in fact, proceed, only to be shot down by the Surface Transportation Board (STB). The downing of the effort by the STB, I thought, would probably not be late in the game. Surprisingly, CP came to its senses before it got that far.

In the week gone by since that decision, there has been considerable speculation as to the reason for dropping the merger. I’d like to give you my opinion, but after taking a look at some of the likely reasons.

Reason 1: The current administration is not friendly to mergers. Although the STB ostensibly belongs to Transportation, Treasury and Justice have more clout. Treasury has recently nixed the Pfizer-Allergan pharm league, and Justice has filed to prevent Halliburton from merging with another oilfield giant, Baker Hughes. Justice has also made it clear that it opposed CP+NS. I can’t see Harrison being frightened by this, but his activist investors? Maybe.

Reason 2: Other transportation interests didn’t like it. Let’s face it. Fed Ex and UPS are big rail customers, with UPS being the biggest. They didn’t like it. Neither did other interests that benefit from operations through Chicago. CP+NS’s greatest benefit would have been the ability to bypass Chicago. Concessions during the hearing process could have severely limited this benefit.

Reason 3: The unions didn’t like it. CP has a history of cutting jobs to satisfy its activist investors and principle shareholder Pershing Square Capital Management. Unions don’t like any entity with the word management in the title. There would have been enormous pressure to change the hiring and seniority structure at NS.

Reason 4: The State of West Virginia didn’t like it. The Register-Herald of Beckley, West Virginia, reports NS as having a payroll of $67 million in the state supporting 1,000 jobs, 400 retirees and their families, and spending $85 million in infrastructure. That’s not peanuts.

Now I’ll tell you what I think really happened and why. In my opinion, the objective of the merger was to strip as much short-term value out of NS for stockholders as was possible. As rosy as this prospect appeared to CP’s owners, the economic reality was really something else. I have to assume that the merger was in the works for at least a fiscal quarter before it became public in November 2015. Since then, when the merger was a gleam in the great eye of the capital managers, the economy has presented a different picture to the railroads. Coal traffic is plummeting even faster than most thought it would. Carload traffic has been down on the year, and intermodal is weak or holding. Trucks picked up traffic that the railroads couldn’t because of the huge spurt in crude (oil) by rail (CBR), and shippers realized they didn’t have to go back to rail when CBR faltered.

I think that CP suddenly saw itself on the cusp of a merger just as a possible recession hits the US economy. The slightest whiff of merger meltdown, a malady that has plagued railroad mergers in the past, would put CP into the public eye as the big Canadian bully that brought down the economy. This may have happened even if the STB was still in decision mode under the voting trust plans proposed by CP. Even were public relations gurus able to spin it away from CP, recession in the US economy would have doubled down on all bets against merger success. It may have been the best of times for merger two quarters ago, but it may indeed be the worst of times now.

Now if a recession doesn’t happen... Capital managers are a voracious lot and don’t like to wait for payout. Maybe there will be another CP+NS proposal under our tree come Christmas.

© 2016 – C. A. Turek – mistertrains@gmail.com

(Charles A. Turek is a writer and novelist based in Albuquerque, NM. After four decades working in areas of the insurance industry related to transportation, he now writes on all aspects of American railroading. Charles is a political conservative but believes in public funding of passenger rail as a part of the federal government’s constitutionally conservative obligation to provide for defense and public infrastructure so that private enterprise may flourish.)

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