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Canadian Pacific Bids for Norfolk Southern: Merger in Cards?

Speculations surrounding the acquisition of U.S. carrier Norfolk Southern Corp. NSC were put to rest when leading Canadian railroad operator Canadian Pacific Railway LimitedCP announced the possibility of a merger between these railroad operators. The deal will be financed through both cash and stock. However, the value of the transaction has been kept under wraps.

As per Norfolk Southern, the proposed bid is valued at $46.72 in cash and 0.348 of a Canadian Pacific share for every Norfolk Southern share. Each Norfolk Southern share is valued at a premium of lower than 10% as per yesterday's closing price. Meanwhile, Norfolk Southern has decided to evaluate the offer.

Proposed Merger Benefits

A successful merger between Canadian Pacific and Norfolk Southern will create over 33,700 miles of transcontinental track, thus improving connectivity between three major tidewater transport hubs which include the Pacific Ocean in British Columbia, the Atlantic Ocean and Gulf of Mexico via Norfolk Southern's network.

Moreover, the consolidation will not only build a single railroad but will also enhance coast-to-coast connectivity by simply sidelining the busiest Chicago hub, thereby allowing timely delivery of goods to vendors with fewer stops and at a competitive rate. Furthermore, the merger will certainly help Canadian Pacific surpass Canadian National Railway Company CNI in terms of railway track coverage.

Constrains

Canadian Pacific will face financial restrictions while pursuing the acquisition of Norfolk Southern, which has a market capital of nearly $26 billion, as the former has limited cash resource and nearly $8 billion in debts. Thus, further issue of debt will increase leverage for this Virginia-based company.

Also, the proposed deal will be closely scrutinized as the U.S. railroads are subject to the jurisdiction of various regulatory agencies including the Surface Transportation Board (STB), the Federal Railroad Administration (FRA) and other state and federal regulatory agencies.

As a result of these, there has been no merger or acquisition in the U.S. railroad industry in the last 15 years. Last year, Canadian Pacific ended collaboration talks with peer CSX Corporation CSX .

Currently, both Canadian Pacific and Norfolk Southern carry a Zacks Rank #3 (Hold).

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CSX CORP (CSX): Free Stock Analysis Report

CDN NATL RY CO (CNI): Free Stock Analysis Report

NORFOLK SOUTHRN (NSC): Free Stock Analysis Report

CDN PAC RLWY (CP): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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