Canadian Pacific drops bid for U.S. railroad Norfolk Southern

​​​​​​​Canadian Pacific Railway Ltd. (TSX: CP) (NYSE: CP) announced April 11 that it has terminated efforts to merge with Norfolk Southern Corp. (NS), including the withdrawal of a resolution asking NS shareholders to vote in favor of good-faith negotiations between the two companies.

No further financial offers or overtures to meet with the NS board of directors are planned at this time, said CP.

The NS Board of Directors had unanimously rejected CP’s unsolicited acquisition proposals, after it determined that each was “grossly inadequate” and would face substantial regulatory risks and uncertainties that CP would be highly unlikely to overcome. 

CP had proposed the creation of an “end-to-end” railroad that it said would enhance competition, ease freight congestion now and into the future, improve service to shippers, better support the economy and generate significant shareholder value for both companies. NS is one of two major railroads in the eastern U.S. and a major hauler of coal.

“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.

On March 29, CP filed its definitive proxy statement with the SEC related to Norfolk Southern Corp.’s 2016 Annual Meeting of Shareholders. At this time, CP does not intend to solicit proxies for any proposals at the NS Annual Meeting and does not intend to submit any proxies previously furnished to the persons identified in the CP Definitive Proxy at the NS Annual Meeting. CP requests that Norfolk Southern shareholders discard the previously distributed green proxy cards.

Canadian Pacific is a transcontinental railway in Canada and the United States with direct links to eight major ports, including Vancouver and Montreal, providing North American customers a competitive rail service with access to key markets in every corner of the globe. CP is growing with its customers, offering a suite of freight transportation services, logistics solutions and supply chain expertise.

Norfolk Southern Corp. (NYSE: NSC) is one of the nation’s premier transportation companies. Its Norfolk Southern Railway subsidiary operates approximately 20,000 route miles in 22 states and the District of Columbia, serves every major container port in the eastern United States, and provides connections to other rail carriers. Norfolk Southern operates the most extensive intermodal network in the East and is a major transporter of coal, automotive, and industrial products.

FirstEnergy raised merger concerns related to coal hauls

FirstEnergy (NYSE: FE) on April 8 filed an objection with the U.S. Surface Transportation Board over a CP proposal to create a “voting trust” as a precursor to the takeover of NS.

Said the FirstEnergy objection: “While some coal is delivered by barge to FE’s power plants, most of the coal that FirstEnergy uses is transported to FE’s coal-fired plants in whole or in part by railroad. FirstEnergy no longer ships coal on CSX Transportation, Inc. (“CSX”) but it does ship millions of tons of coal annually on NS, which at times may originate in the west (from the Powder River Basin). The western coal used by FE is transported to interchange with NS (typically in Chicago, IL) by BNSF Railway Company (“BNSF”). Other coal used by FE originates in the east on the lines of NS. Nearly all of the coal shipped by FE by rail is transported by rail carriers under rail transportation agreements, and that transportation is, therefore, generally not subject to regulation by the STB.

“FE has not always seen eye-to-eye with the railroads transporting coal for it, but FE has generally resolved its disputes with the railroads through commercial means, rather than in regulatory proceedings at the STB. Even when FE, like so many other rail shippers, was having substantial rail service issues with various railroads in 2013-15, it did not resort to the STB for relief, relying instead on commercial means to deal with those issues.

“However, FE is fully aware that, as a result of past rail merger and acquisition proceedings involving “Class I” railroads, such as the mergers of (a) Union Pacific Railroad (“UP”) and Chicago & North Western Railway and (b) UP and Southern Pacific Railroad, and (c) the acquisition and subsequent division of Conrail by NS and CSX, substantial service problems resulted. Those service problems were both serious and, in some instances, persistent.

“As a result of such experiences, and because of the STB ‘s concern that the next merger of “Class I” railroads would trigger the final round of mergers of Class I railroads, resulting in two Class I railroads in North America, the STB substantiaJly modified its rail merger policy in 2001, after the BNSF and Canadian National Railway (“CN”) proposed to merge. As a result of the STB’s merger moratorium, the proposed BNSF-CN merger did not occur. The STB’s new rail merger policy has not, therefore, ever been applied.

“In addition to causing other changes in STB merger policy, such as a “procompetitive” approach required for mergers, STB consideration of other rail mergers that are likely to occur as a result of the proposed merger at issue, and additional safety and rail-service considerations required of the merging carriers, that 2001 STB rail merger policy included a new policy, reflected in a revision [of federal regulations], with respect to “voting trusts” that are typically used in nearly all rail mergers while the railroads involved seek authority to merge from the STB. In that new policy concerning voting trusts, the STB’s regulation states in relevant part: “In each proceeding involving a major transaction, applicants contemplating the use of a voting trust must explain how the trust would insulate them from an unlawful control violation and why their proposed use of the trust, in the context of their impending control application, would be consistent with the public interest.”

“The STB’s new voting-trust policy, and the application of that policy to CP’s Petition, are the primary subjects of this Reply to the Petition.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.