Calgary, Alberta-based Canadian Pacific Railway Ltd. on Monday announced it was terminating its efforts to merge with Norfolk Southern Corp. Canadian Pacific had pursued the merger in an attempt to create a North American railroad that would stretch from Canada's west coast to the Gulf of Mexico and Atlantic Ocean in the U.S.
In a statement on the company's website, Canadian Pacific said its decision included "the withdrawal of a resolution asking NS shareholders to vote in favor of good-faith negotiations between the two companies."
The company went on to state that, at this time, Canadian Pacific has no further plans for financial offers or meetings with the NS board of directors.
"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 Canadian Pacific CEO E. Hunter Harrison.
The resolution CP sent to Norfolk Southern shareholders and then later withdrew is likely the very thing that sent the possibility of a merger spiraling downward.
PETITION TO U.S. SURFACE TRANSPORTATION BOARD
On March 3, CP filed a petition with the U.S. Surface Transportation Board for declaratory order concerning CP's interest in buying the Norfolk Southern (NS). In the petition, CP stated they were pursuing a merger with NS, which had refused CP's overtures based in large part, on its assertion that the Surface Transportation Board would not approve CP's proposed voting trust structure.
"This assertion appears to be intended to discourage stockholder support for a CP-NS meeting to discuss the benefits of a merger, and thus its mere presence shields NS's current management from their own stockholders by creating the impression that the regulatory process creates insurmountable obstacles to any transaction," Canada Pacific stated in its petition. "A declaratory ruling from the board providing guidance would remove such uncertainty, and thus leave stockholders free to make decisions about the efficacy of further meetings based on the potential benefits of a merger, not on ersatz regulatory concerns."
Soon after the petition was filed, opposition grew louder and many groups responded to the STB, asking them to allow interested parties 45 days to reply to the March 2 petition.
At the JPMorgan Aviation, Transportation and Industrials Conference on March 9, Canadian Pacific CEO E. Hunter Harrison was questioned about the CP bid for the Norfolk Southern and the filing to the STB. "We're hoping that the resolution, whether it's overwhelming or for whatever reason, would cause them to have second thoughts, and maybe they would sit down and talk to us. As they sit down and talk to us, and we still can't agree, and they decide they don't want to do a deal, then we're closing shop and we're going to Calgary, and we're going to run a hell of a railroad in Western Canada and see what happens to the North American network, and reward some shareholders and have some fun. We don't have to do this deal. I mean, look, Alberta beef is good, but we just got some gravy we thought was even better. Let's make it even better. But if they don't want gravy on their steaks, then fine," said Harrison.
On March 10, the STB published a decision stating that, "Replies will be due by April 8, 2016, and should address the merits of CP's petition. CP will be permitted to file a rebuttal by April 13, 2016."
UNITED STATES GOVERNMENT RESPONDS
Since Dec. 7, 2015, a number of stakeholders had submitted correspondence to the STB about CP's pursuit of the NS. Those submitting comments included members of Congress, state and local officials, shippers and members of the public. While all responses to the proposed merger have not been negative, these latest responses may have been the final blow to the deal.
An example of one of the responses opposing the merger was a statement released by U.S. House Transportation and Infrastructure Committee Chairman Bill Shuster, R-Penn., on April 5: "I have closely followed Canadian Pacific's attempts to merge with another railroad over the past several years, and after looking at the merits of the current proposal to merge with Norfolk Southern, I do not believe it is in the best interests of the U.S. freight transportation system, railroad employees, rail shippers, and the short line railroads."
"A strong, healthy, and well-functioning freight rail system is critical to the movement of goods in this country. However, CP's pursuit of a merger over the last two years has done nothing but create uncertainty in the rail industry, and there continues to be no clear path forward for such an arrangement," Shuster said. "I have expressed my concerns to the appropriate federal agency, and I believe it is time for all parties to move on from hypothetical merger proposals and focus on improving the transportation of goods and products to help grow the American economy."
On Thursday, April 7, the United States military filed a response to the STB saying, "It is too early to determine whether either a CPRL+NSR merger itself, or a downstream merger involving other major railroads, would degrade national defense. However, the potential certainly exists for either the CPRL+NSR merger or a downstream merger to adversely affect national defense. Therefore, it is critical that no common control of CPRL and NSR occur prior to the board ruling that such common control, and the merger that cements it, is permissible. Such a ruling should certainly consider the effects of both the CPRL+NSR merger, and any resultant downstream mergers, on national defense." (http://goo.gl/…)
On Friday, April 8, the U.S. Department of Justice filed an 11-page reply to the CP petition for a declaratory order saying, "The STB should reject the proposed voting trust structure because it risks altering the competitive landscape between the CP and NS and indeed the entire rail system in a way that could not be reversed if the STB rejects the merger. We believe that this voting trust would create unlawful control violations and would be inconsistent with the public interest." (http://goo.gl/…)
I have read through many of the responses provided to the STB concerning the Canadian Pacific's pursuit of Norfolk Southern. I have also spoken to various CP grain elevator customers over the past year about the merger proposal, and some expressed their concerns with one word: "monopoly." Shippers on the CP have also expressed concerns that rail rates would increase if a merger were to go through and wondered if service may also be negatively affected. Meanwhile, shippers on the Norfolk Southern railroad made it very clear in the many comments to the STB that they were concerned Canadian Pacific may change the infrastructure of NS and have a detrimental effect of those states' agriculture landscape.
I would agree with their concerns about service changes, especially on the Norfolk Southern railroad. The possibility of rail rate increases was a strong possibility had the merger gone ahead. Grain prices have dropped significantly since harvest 2015. And while rail service has improved throughout the U.S. since 2014, the last thing grain shippers need right now is the fear of increased costs.
Here is a link to all correspondence sent to and from the STB since December 2015: http://www.stb.dot.gov/…
Mary Kennedy can be reached at firstname.lastname@example.org
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