Canadian Pacific ends bid to buy Norfolk Southern

AP News
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Posted: Apr 11, 2016 4:53 PM
Canadian Pacific ends bid to buy Norfolk Southern

OMAHA, Neb. (AP) — A major railroad merger appears unlikely in the near future after Canadian Pacific dropped its roughly $30 billion bid for Norfolk Southern on Monday.

The ill-fated deal would have been the first to test tough rules for railroad mergers that were drafted in 2001. But Canadian Pacific's proposal faced strong opposition from Norfolk Southern, politicians and rail customers along the route and other railroads.

Canadian Pacific dropped the deal before the federal Surface Transportation Board could rule on its proposed structure and before Norfolk Southern shareholders vote whether to support merger talks. The Justice Department's opposition to the deal's structure announced Friday may have sealed the decision.

"There were just too many obstacles to overcome," Edward Jones analyst Logan Purk said.

For starters, the rules governing major railroad mergers are so strong that even with buyouts coming at an unprecedented pace in other industries in the last two years, no one had even suggested a merger of major railroads since 1999.

The rules now require any merger involving one of the handful of major railroads with at least $476 million in revenue to show that they will increase competition as part of any deal. Similar deals are blocked in other industries only if there is a risk that competition will be reduced.

The rules also require railroad mergers to be in the public interest, an issue of tremendous scope.

Regulators say the new merger rules were needed because of the service problems that followed past deals and because so few major railroads remain, so there isn't excess capacity.

But long before regulators got a chance to examine this proposed deal, members of Congress, railroad customers and port officials in Virginia and Alabama were raising questions about how it might affect price and service. And many worried that allowing Canadian Pacific and Norfolk Southern to merge would inspire more rail combinations.

Other railroads spoke out against the merger, and then last week the Justice Department and U.S. Army joined the chorus of critics.

"There was absolutely no support in official Washington for this merger," said Frank Wilner, who has written six books on the rail industry and previously worked for the Association of American Railroads, the federal Surface Transportation Board and one of the major rail unions.

The deal would have created a transcontinental railroad stretching across the eastern United States and Canada that many observers believed would have triggered a wave of railroad mergers.

Canadian Pacific operates railroads in Canada and parts of the U.S. Midwest and South, while Norfolk Southern of Norfolk, Virginia, operates railroads along the East Coast, Midwest and South. Canadian Pacific first offered to buy Norfolk Southern in November.

Until the political environment changes, which could come with this year's presidential elections, Wilner said he doesn't think other railroad mergers are likely, although railroads could see more pressure from activist investors.

Purk said the potential for any major railroad deals will likely decrease for at least a year or two.

"This was the best chance," he said.

Canadian Pacific decided it wasn't worth continuing to fight for this deal now.

"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," CP CEO Hunter Harrison said.

The deal's collapse will put pressure on Norfolk Southern executives to deliver the improvement they have promised.

The railroad based in Norfolk, Virginia told investors it plans to cut $130 million in costs this year and create more than $650 million in annual cost savings by 2020 while improving service.

Norfolk Southern said its managers have made significant progress with their plan.

"We are confident the continued execution of our plan will deliver superior value to all of the company's stakeholders by best positioning Norfolk Southern to succeed," Norfolk Southern said in a statement.

Shares of Norfolk Southern Corp. fell $2.21, or 2.7 percent, to close $79.28 on Monday. U.S. shares of Canadian Pacific Railway Ltd. gained $4.58, or 3.4 percent, to $139.37.