Railroad Mega-Merger Not A Slam Dunk: Here's Why

• Norfolk Southern Corp. (NYSE: NSC) has seen an almost 11 percent increase in its share price over the past month, with the share price touching $89.50 on November 13.
• Deutsche Bank’s Robert Salmon has maintained a Hold rating on the company, while raising the price target from $84 to $93.
• After market close on Tuesday, Canadian Pacific Railway Limited (USA) (NYSE: CP) announced that it had made an offer to Norfolk Southern, proposing a combination of the two railroad businesses.

According to the Deutsche Bank report, “The proposal includes a “sizable premium in cash and stock offered to NSC shareholders” that would create a company with the potential for “faster earnings growth than either CP or NSC could achieve on their own,” while maintaining a robust credit rating.

Related Link: Railroad Benchmarking: Canadian Rails Top Barclays' Quarterly Review

Analyst Robert Salmon stated that Norfolk Southern’s Board of Directors has a “fiduciary obligation” to review the proposal from Canadian Pacific. Norfolk Southern’s management has usually been cautious regarding large scale rail M&A, “given regulatory and service risks as well as fewer expected synergies.”

The Wall Street Journal reported that the merger proposal was “met with a chilly reception” by Norfolk Southern. If a deal is announced, Salmon expects the Surface Transportation Board to review the potential merger closely.

“The potential inking of a merger agreement between NSC and CP is by no means a foregone conclusion given NSC’s apparent reluctance as well as the need to gain regulatory approval,” Salmon added.