CP Rail Jumps Most Since 2009 on Talk It May End Norfolk Bid

  • Analysts interpret CP chief's comments on reviewing strategy
  • RBC Capital upgrades shares, sees possibility of buyback

Canadian Pacific Railway Ltd. surged the most in more than six years as speculation mounted that the company may drop its attempt to purchase Norfolk Southern Corp.

Canada’s second-largest railroad climbed 11 percent to C$165.74 at the close in Toronto, its biggest single-day gain since July 2009. Friday’s advance pared Canadian Pacific’s decline this year to 6.2 percent.

Faced with growing political and shipper opposition to the deal, Canadian Pacific may need to adopt a different strategy, Chief Executive Officer Hunter Harrison said Thursday without being specific. His comments may open the door to Canadian Pacific ending its pursuit of the No. 2 railroad in the eastern U.S., according to analysts from at least eight firms.

“The company (for perhaps the first time) gave the indication that it could pull back from pursuing the proposed deal in the near term,” Allison Landry, an analyst at Credit Suisse Group AG, said in a note to clients Friday.

Federal and state lawmakers, shippers and railroad operators have written letters to the U.S. Surface Transportation Board opposing any proposed transaction, even though a formal evaluation process hasn’t begun.

“When you’re playing the game and somebody changes the rules on you, you have to review your strategies,” Harrison said Thursday on a conference call. A Canadian Pacific representative declined to provide additional comment Friday.

The railroad was raised to outperform from sector perform by RBC Capital Markets analyst Walter Spracklin. The stock’s drop of about 40 percent through Thursday from a 2015 peak means the valuation now reflects risks associated with the company, he said. The shares closed at a record C$242.51 last March.

Share Buyback

Dropping the Norfolk Southern bid may result in Canadian Pacific reviving a stock repurchase plan -- a scenario to which Harrison alluded on Thursday. A share buyback “could measure into the billions” annually, Spracklin said, pointing to the C$4.7 billion ($3.3 billion) that Canadian Pacific spent on repurchases in 2014 and 2015.

Buybacks have “worked well for us” in the past, Harrison said.

Letting go of Norfolk Southern would benefit Canadian Pacific stock by turning executives’ attention squarely toward running their railroad, wrote National Bank Financial’s Cameron Doerksen.

“Our fear is that CP management is consuming too much time and effort on fighting for the merger at a time when the company is facing its own volume-related challenges,” he wrote. “As such, we would view an abandoning of the merger effort as a potential positive for CP shares.”

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