Canadian Pacific Railway (CP) will abandon its bid to buy eastern U.S. railroad Norfolk Southern Corp. (NS) if NS shareholders reject a CP resolution asking their board to engage in a dialogue over CP's proposed $28 billion acquisition, CP's CEO said today.
E. Hunter Harrison told an investment conference that Calgary-based CP is already making plans to walk away in the event NS shareholders reject the proposal, which was announced Tuesday and will be presented at the Norfolk, Va.-based railroad's annual meeting, the date of which has not been determined. The resolution is nonbinding, meaning NS' board would not be required to meet with CP even if the shareholders approved it. Harrison said today that he is not sure NS' board would agree to meet.
NS said in a statement yesterday that the board sees no reason to talk again with CP unless it presents an offer that is financially compelling and could withstand regulatory scrutiny. The companies have met just once since CP made its initial offer in mid-November. Canadian Pacific has made three offers to Norfolk Southern, each of which was rejected. CP had hinted at a proxy fight for NS shares if the third offer was rejected. However, Harrison's comments in yesterday's announcement contained little combativeness or hints of aggression. Rather, it reflected CP's acknowledgment that it was fighting an uphill battle that might not be worth the effort in time and resources.
"We are not asking NS shareholders to vote on the existing proposal; we are simply asking them to vote in favor of having their board talk to us," Harrison said. The proposal formalizes sentiments of many NS shareholders that their board should, at the very least, discuss the proposal with CP.
The proposed combination would create North America's first end-to-end transcontinental railroad combination. However, it is opposed by other railroads, several shipper groups, and members of Congress. The main concerns are the potential loss of jobs at NS, higher rates for shippers due to the elimination of NS as a stand-alone provider, and the possibility of further consolidation as big Western railroads like Fort Worth, Texas-based BNSF railway and Omaha, Neb.-based Union Pacific Corp. react by pursuing eastern giant CSX Corp. or Kansas City, Mo.-based Kansas City Southern, the only U.S. "Class I" carrier that operates exclusively on north-south lanes. The overriding fear among shippers and lawmakers is that the continent would be left with three or four huge railroads, and that shippers would be severely disadvantaged.
In an effort to allay regulatory concerns, CP has proposed that it put itself in a voting trust insulate it from financial control of NS. CP and NS would then operate as an integrated entity while STB evaluates the combination, a process that could take up to 22 months. Harrison would run NS, while his second-in-command, Keith Creel, would run CP. The STB would have to approve the voting-trust proposal.
Clarification: An earlier online version of this story incorrectly stated that CP has asked the STB to approve the railroad's voting-trust proposal. CP has proposed the idea, but has not presented it to the STB.
Gartner, Inc.
