Canadian Pacific has a new target, and a better shot at getting a deal done.
The railroad backed by Bill Ackman (yes, that Bill Ackman) is exploring a takeover of $26 billion U.S. carrier Norfolk Southern, Bloomberg News reported Monday, citing people familiar with the matter. The approach comes about a year after Canadian Pacific tried and failed to strike a deal with CSX.
A lot has changed since then. For one, the rail industry is one of the few areas where potential targets have actually gotten cheaper. Since peaking last November, the S&P 500 railroads index has reversed course to drop almost 30 percent as falling commodity prices eroded crude oil and coal volumes.
When stock markets had their meltdown in August, Norfolk Southern dropped to its lowest valuation relative to profit in more than two years.
The climate for mega-deals is also more welcoming. Canadian Pacific's approach to CSX itself forced investors to rethink the notion that regulatory constraints would limit any further railroad consolidation. And given the flurry of $50 billion-plus deals that have been struck across industries this year, a giant east-west railroad combination seems like less of a stretch.
Like CSX, Norfolk Southern focuses on the eastern U.S. The two have almost identical market caps. Norfolk Southern may be a bit more vulnerable, though.
Norfolk Southern has trailed CSX in terms of revenue performance during the past three years, and the trend is set to continue. Norfolk Southern CEO Wick Moorman, who bashed the idea of a major railroad merger as "highly problematic" last year, is also no longer in charge of the company. He handed over the CEO reins to James Squires in June and stepped down as chairman on Oct. 1.
There are still challenges to a deal. The seven largest U.S. and Canadian railroads account for more than 90 percent of North American rail revenue, whereas the top 10 trucking companies make up only about 10 percent of that industry’s revenue, according to Bloomberg Intelligence. So regulators are going to give any big rail transaction a tough review.
Norfolk Southern is also a bit of an odd choice considering that Canadian Pacific literally just sold a chunk of its Delaware & Hudson line to the company in September. And without taking any synergies into account, a deal wouldn't be as accretive for Canadian Pacific as a combination with CSX, according to data compiled by Bloomberg.
Canadian Pacific must see something it likes though, and there's no time like the present to give a mega-deal another shot.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the author of this story:
Brooke Sutherland in New York at email@example.com