Canadian Pacific Calls Off Norfolk Southern Merger Bid
Canadian Pacific Railway terminated a plan to combine with Norfolk Southern Corp., ending the Canadian carrier’s efforts to complete the first merger among major railroads since 1999.
The Calgary, Alberta-based company announced that it was withdrawing from efforts to win shareholder approval for a resolution that would have directed the U.S. railroad’s board to negotiate about a deal. The Canadian carrier had been trying for five months to buy Norfolk in a cash and stock deal worth about $30 billion, but was rebuffed three times by the U.S. carrier.
Canadian Pacific began its merger pursuit in November, claiming it could cut costs and boost profits at Norfolk Southern. The U.S. carrier responded that the offer worth about $94 a share was too low and that the pursuer’s proposal appeared to violate U.S. rail merger rules.
Those rules were rewritten by the Surface Transportation Board in 2001, two years after Canadian National Railway and BNSF Railway proposed a merger that was called off after opposition by other railroads as well as shippers.
“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.
The combination would have created a carrier with truck/rail shipment volume nearly as large as the industry-leading BNSF. The combined company would have become the third-largest North American railroad with revenue topping $16 billion, more than 40,000 workers and profit annually before interest and taxes of more than $5 billion.
There was no immediate comment from NS, whose annual meeting on May 12 would have been the place where shareholders voiced their opinion on whether its board should sit down with CP to discuss a deal.
The CP announcement was made amid growing opposition in the U.S. The U.S. Department of Justice’s anti-trust division opposed the deal, though it had no jurisdiction over rail mergers that are reviewed by STB. Rep, Bill Shuster, a Pennsylvania Republican who chairs the House Transportation & Infrastructure Committee earlier this month stated his opposition. UPS and FedEx, the two largest companies on Transport Topics Top 100 For-Hire Carriers in the U.S. and Canada, which use the carriers for intermodal moves, opposed the plan as well.
In addition to those comments, the STB received about 200 letters, mostly in opposition to the plan.
By withdrawing its shareholder resolution, CP also mooted its effort to win an STB ruling in favor of its structure if the two companies agreed to a merger. Its plan would have installed Harrison as CEO at Norfolk, which has the worst operating ratio among North American carriers. Harrison said in his campaign for NS that the railroad’s operating ratio could be reduced by more than 10 percentage points to around 60, the same level as his company last year.
Norfolk in response to the merger threat has identified a five-year plan to save $650 million and bring its operating ratio down to 65.
