About 71% of rail shippers surveyed by Cowen and Company do not support a merger between Canadian Pacific (CP) and Norfolk Southern (NS), even though opposition to a Class I merger per se has dropped, the company reported on Dec. 7, 2015.
“With CP remaining committed to a deal despite NS's rejection, we believe CP shares could come under pressure in the near-to-intermediate term, while shares of NS, CSX, and Kansas City Southern (KCS) could outperform peers,” said Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl.
In this special-edition, merger-specific rail shipper survey, about 59% of shippers say they are opposed to a Class I merger, compared to 58% in Cowen and Company’s 3Q15 Rail Shipper Survey, which in turn represented a decline in the number of opponents from the 70% recorded in the 2Q15 survey and the 76% in the 1Q15 survey. However, when it came to a specific CP-NS merger, a strong 71% majority of shippers said they would not support a CP-NS merger; 16% of shippers appear to be open to considering such a deal; while 13% noted they would support the combination. “As such, a sizable minority of shippers may be in support of a Class I merger, just not between CP and NS,” Seidl said. “A combination between a western U.S Class I and an eastern U.S. Class I may make more sense to some. This is something that NS’s management appeared to hint to on its Friday conference call. It would not surprise us if Berkshire Hathaway, which owns BNSF and has shown strong interest in the railroad industry over the years, would show interest in another Class I.”
Of the shippers who said they would not support a CP-NS merger, 35% attributed their stance to a belief that pricing would go higher as a result. About 31% said they feared this would lead to other mergers/fewer options, and 25% believed service would be negatively impacted. The remaining 9% cited “other” reasons. Of the shippers who said they would support a CP-NS merger, 38% attributed their stance to the potential of more open access that could come with such a merger. Another 38% said they believed service would improve, and 25% cited “other” reasons. None of the survey participants appear to believe pricing would get better for them as a result of a CP-NS merger.
“Given the opposition to a CP-NS merger by a majority of shippers, some of whom appear passionate about their stance, and considering NS management’s rejection of CP’s offer, we believe the Canadian carrier’s vocal commitment to still pursue a transaction could weigh on the company’s shares in the near-to-intermediate term,” Seidl said. “On the other hand, NS and any other carriers that may be viewed as potential targets for future consolidation, namely CSX and KCS, may see their shares outperform peers. At this point, CP could either sweeten the offer or decide to go directly to NS’s shareholders. In either case, NS shares should rise and lift shares of CSX and KCS somewhat. Whether it is a hostile takeover or a friendly merger, Surface Transportation Board approval is likely to remain the biggest hurdle to overcome.”