Proxy fight looms in CP's battle for Norfolk Southern

Norfolk Southern Co. on December 14th officially rejected Canadian Pacific Railway Ltd.'s latest $30 billion bid to merge the two railroads, bringing the rivals a step closer to a potential proxy fight.

The Norfolk, Va.-based railroad outlined in a letter its reasons for rejecting the "grossly inadequate" new offer, including what it said was less overall value and cash than CP's first offer.

"Moreover, nothing in the revised, reduced proposal addresses the concerns of the Norfolk Southern board arising out of our extensive review of your prior proposal," the letter adds, "including with respect to the substantial regulatory risks."

Norfolk Southern challenged CP's assertion that its bid would pass regulatory muster with the U.S. Surface Transportation Board, which has established tougher, largely untested rules mandating rail mergers promote competition.

The rejection of Canadian Pacific's latest offer isn't expected to end this contest, however. Last week, activist investor and CP shareholder William Ackman said Norfolk Southern's continued resistance is "reasonably likely" to lead to a proxy fight similar to the one he successfully launched four years ago at CP that resulted in a majority of CP's directors being replaced and Hunter Harrison being appointed CEO.

Canadian Pacific, based in Alberta, has its U.S. headquarters in Minneapolis.

A CP-NS merger would most certainly lead to a "final round" of consolidation in the railroad industry, including BNSF Railway Co., according to Matthew K. Rose, executive chairman of BNSF. If Canadian Pacific buys Norfolk Southern, "we'll be all in, and we're going to play in it," Rose said in an interview.

Rail customers don't want the consolidation, Rose said, and neither does BNSF, because of the cost, the interruptions and the fact that "the industry is truly hitting its pace right now." He said the concern is that consolidation will make the rail network more vulnerable to disruptions and offer shippers fewer choices. In a survey of rail shippers by Cowen & Co. earlier this month, 71 percent of respondents said they oppose the merger. Many said they feared fewer options and higher prices.

But a CP-NS merger would change the balance of power in the rail industry, Rose said, due to the $1.8 billion in synergies CP has said it would reap from the transaction -- not including the tax benefits. And the move would destabilize the eastern part of the nation's rail network, particularly putting Jacksonville, Fla.-based CSX Corp. "under a lot of stress," he said. "We're not going to sit on the sidelines while the industry goes through this consolidation."

Rose wouldn't say how or when BNSF might enter the consolidation fray. But if Ackman is successful in merging CP with Norfolk Southern, BNSF could make a play for CSX, rail-industry executives and analysts say. Or BNSF could make a rival bid at some point in the contest for Norfolk Southern.

The two railroads have been locked in a public battle since CP officially launched its bid to combine with its American counterpart on Nov. 17. Norfolk Southern has resisted its advances, saying the regulatory hurdles are too high and that CP's price is too low.

CP has argued that it would open its tracks and terminals to competitors if service or pricing suffered and that it would reduce congestion in Chicago, things that would help it gain regulatory approval in the U.S.

Source: Dow Jones Newswires