Canadian Pacific Calls Off Bid for Norfolk Southern

The proposed nearly $30 billion merger of Class I railroad heavyweights Canadian Pacific (CP) and Norfolk Southern (NS) has come to an end despite myriad repeated overtures by the former.

That was the word from Calgary-based CP, with the company saying today it has officially terminated its efforts to merge with CP, coupled with withdrawing a resolution in which it had asked NS shareholders to vote in favor of good-faith negotiations between the railroads and stating that it will not make any further financial offers or overtures to meet with the NS board of directors.

“We have long recognized that consolidation is necessary for the North American rail industry to meet the demands of a growing economy, but with no clear path to a friendly merger at this time, we will turn all of our focus and energy to serving our customers and creating long term value for CP shareholders,” said CP CEO E. Hunter Harrison in a statement.

CP initially expressed its interest in acquiring NS in November 2015, explaining it believed the combined railroad would offer unparalleled customer service and competitive rates that would support the success of shippers and industries it serves and also satisfy U.S. Surface Transportation Board and Canadian regulators.

Other benefits of the proposed deal cited by CP included:

• a new approach to terminal access that would change the status quo in U.S. rail transportation, explaining that in the event the new company failed to provide adequate service or competitive rates, it would allow another carrier to operate from a point of connection over the combined company’s tracks and into its terminals, providing an unprecedented alternative to the affected shipper;
• the new company would give shippers the choice of where they can connect with another railroad along its network, bringing an end to the practice of “bottleneck pricing” to a large number of shippers in the U.S. while further enhancing competition; and
• a combination would alleviate the long-standing issue of congestion in Chicago, which seized into gridlock in the winter of 2014 and hobbled economic growth. By channeling rail traffic away from Chicago, CP would create fluid routes through under-utilized hubs and free up much-needed capacity for other railroads that pass through the city, providing them with new, efficient and competitive service options for their own customers, with a combined CP/NS creating capacity for all shippers without creating the need for more infrastructure.

And over the subsequent five-and-a-half months since CP signaled its desire to acquire NS, it was met by repeated rejections from NS, whom said consolidation among Class I railroads in North America would face significant regulatory hurdles.

NS officials said last December that its board came to the conclusion that CP’s indication of interest was grossly inadequate, creates substantial regulatory risks and uncertainties that are highly unlikely to be overcome, and not in the best interest of the company and its shareholders.

“We believe the regulatory review process would take two years or more from now, with a very low likelihood of approval,” NS Chairman, President, and CEO James Squires wrote in a letter to CP CEO Hunter Harrison and Chairman Andrew Reardon at the time.

“Even in the unlikely event of approval, Norfolk Southern would be in limbo for this extended period, causing loss of momentum and disruption to our business and operations. In addition, substantial regulatory conditions would be required to win regulatory approval, adversely affecting the value of the combined company and the stock our shareholders would receive.”

The top NS executive added that CP’s proposed structure for the deal in which it would take control of NS’s management and operations was unprecedented and has never received STB approval, adding that regulators would not be likely to approve the voting trust structure.

And Squires also explained that the transaction would be “detrimental” to NS’s customer base, citing concerns from customers in regards to the transaction, coupled with NS losing substantial revenues from its service-sensitive customer base if CP were to implement its short-term strategy.

Also working against CP’s odds for its desired outcome to this deal came in the form of pushback from Washington, D.C. and various industry stakeholders.

House Transportation and Infrastructure Committee Chairman Bill Shuster (R-PA) said last week that the proposed merger “was not in the best interests of the U.S. freight transportation system, railroad employees, rail shippers, and short-line railroads.”

Shuster also cited CP’s 2014 attempt to acquire CSX, which stalled out, and explained that a strong, healthy, and well-functioning railroad system is critical to the movement of good in the U.S. And CP’s merger attempts over the last two years have created uncertainty in the rail sector, without a clear path forward for a deal of this kind.

The Department of Justice said in a reply regarding the CP’s petition for a declaratory order over usage of a voting trust (which was scheduled to have been voted on by NS shareholders on May 12 at its annual meeting) pending the Surface Transportation Board’s review of a potential CP-NS merger would fail to preserve the independence of the merging railroads during the pendency of the transaction’s regulatory review and would risk harm to current and future competition.

“Canadian Pacific’s voting trust proposal would compromise Norfolk Southern’s independence and effectively combine the two railroads prior to completion of the STB’s review,” said Assistant Attorney General Bill Baer of the Justice Department’s Antitrust Division.  “That makes no sense.  We urge the STB to preserve its ability to review the impact of the proposal on competition and consumers before Canadian Pacific starts scrambling the eggs.”

Transportation titans UPS and FedEx both came out against the deal, too, with FedEx citing how a CP-NS merger could raise shipping costs and lead to fewer service, and UPS saying a merger would lead to diminished service and increased costs for rail customers, according to a Wall Street Journal report.

Tony Hatch, principal of New York-based ABH Consulting, said that the abruptness of CP’s decision to not move forward was reminiscent of its 2014 decision to back off of its proposed merger with CSX.

“It looks like CP’s Harrison came to the decision that this was not going to work and there is no particular reason to drag it out both externally and internally and can instead focus on things it can do within CP,” he said.

“I am sure it was an enormous distraction and never thought it would happen as the risks would outweigh the rewards, coupled with the stakeholder groups against the deal, including politicians, shippers, and environmental groups.”

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