April 11, 2016 / 12:02 PM / a year ago

UPDATE 4-CP Rail mulls buyback, dividend after dropping Norfolk bid -CEO

(Rewrites throughout, adds context, outlook for industry consolidation, remarks from interview with CEO)

By Nick Carey and Allison Lampert

CHICAGO/MONTREAL April 11 (Reuters) - Canadian Pacific Railway Ltd Chief Executive Hunter Harrison on Monday said the company would consider using cash once planned to acquire rival Norfolk Southern Corp for a potential buyback, dividend, or combination of both.

In a phone interview from Chicago, Harrison also said he didn’t believe that CP’s decision to abandon its $28 billion bid for Norfolk Southern signaled the end of future consolidation among North America’s major railroads.

“It’s just the timing,” he said.

Some analysts have speculated that Kansas City Southern could be a candidate for a deal, and the regulatory barriers might be lower than in the CP-Norfolk Southern scenario. But CP’s Harrison said on Monday that Kansas City, which he called expensive, was “not a good fit.”

The proposed CP-Norfolk Southern deal was criticized by some customers concerned about higher costs and reduced service, and would have been subject to scrutiny from the U.S. Surface Transportation Board (STB), which rewrote its merger rules following a flurry of big deals in the 1990s and has not approved a combination since 1999.

“I think the reaction to this potential merger shows that regulators, politicians and many of the most important rail customers had no appetite for a deal,” said BB&T Capital Markets analyst Mark Levin. “It’s hard to see any mergers happening in the near future.”

Harrison said CP has a positive relationship with its customers, even ones that opposed the merger.

“Nothing in the merger talks created any tension,” he said.

Harrison attributed CP’s decision to abandon its bid to multiple factors including recent remarks by the departments of justice and defense, along with political pushback.

On Friday, the U.S. Justice Department urged the STB to reject a voting trust arrangement Canadian Pacific had proposed as part of its bid.

A day earlier the U.S. Department of Defense said the proposed deal could adversely affect national defense.

CP had touted cost savings of more than $1.8 billion annually from the deal, saying it would create a transcontinental railroad that would provide more efficient, cheaper rail service. Harrison said he did not envisage making further cuts at CP to deliver those savings, because the majority of synergies would have come from Norfolk Southern.

This latest failure followed the recent collapse of other mega transactions, such as pharmaceutical firm Pfizer Inc’s $160 billion takeover of rival Allergan PLC, which ran into antitrust problems.

CP shares rose 3.9 percent in New York Stock Exchange trading on Monday.

Billionaire investor William Ackman, whose hedge fund Pershing Square Capital Management is Canadian Pacific’s biggest owner with 13.9 million shares, had pushed hard late last year for the deal that people familiar with it said was initiated by Harrison.

While Ackman’s fund has been performing poorly this year, posting a roughly 24 percent loss, he named Canadian Pacific as one of the firm’s few winners for 2016 on a conference call with investors last week. A Pershing Square spokesman declined to comment on Monday.

Right from start, many analysts said CP’s merger bid was a long shot because of the regulatory hurdles at the STB.

The climb for CP’s bid grew steeper as major customers, elected officials and government agencies spoke out against a deal or against the structure of CP’s proposal.

Customers including package delivery companies FedEx Corp and United Parcel Service Inc opposed the bid out of fears that CP’s plans to cut costs would hurt rail services.

UPS is the largest customer of the major U.S. railroads.

“UPS is comfortable with the current structure of the North American rail network,” spokesman Dan McMakin said. “We believe that an attempt to integrate differing operating philosophies would be unduly disruptive.”

A previous bid by CP for No. 3 U.S. railroad CSX Corp failed last year.

Rival railroads had also spoken out against a deal.

“The opposition to this deal shows that unless the whole industry gets behind consolidation, it’s not going to happen,” said independent railroad analyst Anthony Hatch.

CP shares were last up 3 percent at C$180.62. Norfolk Southern shares were down 2.4 percent at $79.50. (Additional reporting by Arathy S Nair in Bengaluru; Editing by Shounak Dasgupta and Meredith Mazzilli)

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