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Canadian Pacific Railway Ltd., the second-biggest railroad in Canada, is exploring a takeover of U.S. carrier Norfolk Southern Corp. in a fresh attempt to consolidate the North American industry, according to people familiar with the matter.  The shares surged on the news. 

Canadian Pacific is raising financing and has held early-stage merger talks with Norfolk Southern, which is valued at about $24 billion, said two of the people, who asked not to be identified because deliberations are private.  Discussions are preliminary and talks may not progress or lead to a deal, they said.  Representatives for Canadian Pacific and Norfolk declined to comment. 

A move for Norfolk Southern, the second-biggest railroad in the eastern U.S., would revive Canadian Pacific’s effort to build a transcontinental carrier after talks with CSX Corp. failed last year.  In floating the idea of a CSX tie-up, Canadian Pacific Chief Executive Officer Hunter Harrison upended the long-held view in the industry that it was fruitless to even discuss another merger because regulators would object. 

“We would view a potential transaction positively,” Desjardins Capital Markets analyst Benoit Poirier said in a note to clients.  The challenge, he said, would be winning regulators’ blessing, which makes it “unlikely that a transaction can be completed in the short term.” 

Industry Consolidation

Dealmaking since U.S. railroad deregulation in 1980 has shrunk the number of major U.S. carriers to four alongside Canadian Pacific and Canadian National Railway Co. But Harrison, 71, is a veteran of past rail mergers, and has led an operational turnaround at Canadian Pacific since being lured out retirement in 2012 by activist investor Bill Ackman, whose Pershing Square Capital Management is the biggest shareholder.  The railroad’s market value was about C$27 billion ($20 billion) as of Friday. 

Harrison previously ran Canadian National, where he spearheaded the 2007 agreement to buy Elgin, Joliet & Eastern Railway Co. He was CEO of Illinois Central Corp. when Canadian National agreed to buy that carrier in 1998 in an acquisition valued at about $3 billion. 

Norfolk Southern jumped 11 percent, the most since 2008, to $88.62 at the close in New York, while Canadian Pacific’s 5.7 percent rally to C$188.79 in Toronto marked the shares’ biggest gain since 2013. 

Trading Statement

“There is no material news pending at this time,” Canadian Pacific said in a statement, citing a request from the Investment Industry Regulatory Organization of Canada that it respond to the day’s stock trading. “ CP does not comment on market rumor and speculation.” 

North American railroads have focused on smaller acquisitions in recent years after BNSF Railway Co.’s effort to buy Canadian National fell apart in 2000 amid opposition from the U.S. Surface Transportation Board. 

The last previous major deal involving major U.S. or Canadian carriers was the breakup of Conrail Inc., announced in 1996, with CSX Corp. paying $4.3 billion for some of those assets and Norfolk Southern getting others for $5.9 billion, according to data compiled by Bloomberg. 

Norfolk Southern operates about 20,000 route miles (32,000 kilometers) of track snaking through 22 eastern states, and serves each of the region’s major container ports.  Its connections with western railroads include Chicago and Kansas City, Missouri -- two cities served by Canadian Pacific. 

Canadian Pacific’s network spans southern Canada from Montreal to Vancouver, and turns south to cut across the U.S. grain belt in the Dakotas, Minnesota and Wisconsin before connecting to the rail hub of Chicago. 

The railroads’ cargo markets are complementary.  Intermodal shipments -- goods in containers that can be hauled by ship, rail and truck -- made up 22 percent of Norfolk Southern’s $11.6 billion of 2014 revenue, followed by coal with 21 percent.  Autos and auto parts contributed about 9 percent. 

Canadian Pacific’s biggest shipping category by revenue was industrial and consumer products, at 28 percent of last year’s C$6.62 billion of revenue. 

The stocks of both companies had been falling this year amid declining shipping volumes, due in part to drops in cargo such as coal and oil.  Canadian Pacific fell 20 percent this year through Friday.  Norfolk, Virginia-based Norfolk Southern declined 27 percent in that span. 

— With assistance by Frederic Tomesco, Thomas Black, Beth Jinks, Aaron Kirchfeld, and Eric Lam

(Updates with analyst's comment in fourth paragraph.)