Canadian Pacific Railway Ltd jumps on speculation it may drop Norfolk Southern Corp bid

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

Canada’s second largest railroad gained 9.6 per cent to $164.16 at 12:06 p.m. in Toronto. Shares rose around 11 per cent earlier, their biggest intraday gain since October 2013.

Faced with growing political and shipper opposition towards the deal, Canadian Pacific might need to adopt a different strategy, Chief Executive Officer Hunter Harrison said Thursday without being specific. His comments may open the doorway to Canadian Pacific ending its quest for no. 2 railroad within the eastern U.S., based on analysts from a minimum of eight firms.

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

Related

Canadian Pacific Railway to cut 1,000 jobs in 2016 as weak economy weighs on volumesCP Rail asks U.S. Justice Department to investigate rivals’ reaction to Norfolk bid

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



“When you’re playing the game and somebody changes the guidelines you, you need to review your strategies,” Harrison said Thursday on the business call. A Canadian Pacific representative declined to supply 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 linked to the company, he said. The shares closed at a record $242.51 last March.

Share Buyback

Dropping the Norfolk Southern bid may lead to Canadian Pacific reviving a regular repurchase plan – a predicament to which Harrison alluded on Thursday. A share buyback “could measure in to the billions” annually, Spracklin said, pointing to the $4.7 billion that Canadian Pacific spent on repurchases in 2014 and 2015.

Buybacks have “proved helpful 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 the fact that CP management is consuming too much time and effort on fighting for that merger at any given time when the clients are facing its very own volume-related challenges,” he wrote. “As a result, we would view an abandoning of the merger effort like a potential positive for CP shares.”

Bloomberg News