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CP may make bid for Norfolk Southern

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World Coal,

Canadian rail company, Canadian Pacific Railway (CP), may make an offer for its US rival, Norfolk Southern, according to reports in the financial press. CP is sixth out of seven so-called Class 1 railroads in the US and Canada by revenue and has been trying to increase its reach by buying a larger rival since last year, when it made a failed attempt to buy US company, CSX.

At the time of writing, CP had a market capitalisation US$20.93 billion, while Norfolk Southern had a market capitalisation of US$26.47 billion.

In a statement released at the request of the Investment Industry Regulatory Authority of Canada, CP said there was “no material news pending at this time”.

Following the failure of CP’s CSX bid, the Canadian company’s CEO, Hunter Harrison, argued that greater railroad consolidation in North America would help to reduce congestion on the rail network – although congestion has eased since Harrison made those comments.

However, one independent rail analyst, speaking to the Financial Times, cast doubt on the mergers, highlighting the need for such a deal to undergo a lengthy clearance process with the US Surface Transportation Board.

If the deal did go through, it would be second largest deal in the industry following the 2009 acquisition of BNSF by Warren Buffet’s Berkshire Hathaway in a deal valued at US$44 billion at the time.

US rail company revenues have been hit by the sharp decline in coal shipments over the last year as a result of weakening coal demand in the power industry. Norfolk Southern reported coal earnings down 23% y/y in 3Q15 at US$482 million. The company operates over 20,000 miles in the eastern third of the US with headquarters in Norfolk, Virginia, according to the Freight Rail Works website.

CP currently operates railways in the US and Canada with direct links to eight ports, including Vancouver and Montreal.

Edited by . Further sources: New York Times.

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