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Canadian Pacific explores Norfolk Southern takeover

Coal trains approach Norfolk Southern's Williamson rail yard in Williamson, West Virginia at the border of Pike County, Kentucky May 13, 2015. REUTERS/Valerie Volcovici

By Greg Roumeliotis

NEW YORK (Reuters) - Canadian Pacific Railway Ltd (CP.TO) is exploring a potential acquisition of U.S. peer Norfolk Southern Corp (NSC.N), a person familiar with the matter said on Monday.

The two rail companies have held preliminary merger talks, but there is no certainty that negotiations will advance, the person added, asking not to be identified because the talks are confidential.

The discussions mark the Canadian railroad operator's second major consolidation play in little over a year, as it once again seeks to gain control of a railroad network that would give it access to the U.S. eastern seaboard and rail hubs like Chicago.

Norfolk Southern declined to comment. CP Rail in a release said it has "no material news pending at this time." The company added that it does not comment on market rumor and speculation.

Bloomberg, citing two people familiar with the matter, said earlier on Monday that Canada's No. 2 rail operator CP Rail is trying to raise financing to buy Norfolk Southern in a deal that would be worth over $24 billion. (http://bloom.bg/1ScVTK4)

CP Rail's Chief Executive Hunter Harrison has long contended that a creating a new transcontinental rail network could help improve congestion around Chicago, where east- and west-based railways meet and hand off cargo, a process that can take days.

The Canadian company's talks with CSX Corp (CSX.N), which also owns a large network across the Eastern U.S. failed last year.

Investors cheered news of a potential tie-up, sending shares of Norfolk Southern up 11 percent to $88.62 on the NYSE, while CP Rail's stock closed up 5.7 percent at C$188.79 on the TSX.

"I think it would be great, there's little overlap in terms of footprint," said John Stephenson, president of Stephenson & Co Capital Management. "I think it's potentially an attractive deal."

As in the case of the CSX deal, analysts warned there could be some hurdles around any deal with Norfolk Southern.

"All in a transaction may make quite a bit of operational and financial sense, but there are two major uncertainties," said RBC analyst John Barnes in a note to clients.

Barnes noted U.S. regulators would have to sign off on a foreign company owning a strategic asset, like a railroad and that CP would also need to win approval from the U.S. Surface Transportation Board that reviews such deals.

He said despite minimal geographic overlap, shippers would likely oppose any deal due to concerns over service and pricing.

(Additional reporting by Euan Rocha in Toronto and Manish Parashar in Bengaluru; Editing by Sriraj Kalluvila, Anil D'Silva and Bernard Orr)