Over to you, CP Rail: Norfolk Southern rejects proposed US$28 billion merger

Over to you, CP Rail: Norfolk Southern rejects proposed US$28 billion merger

Main pic: A Canadian Pacific Rail maintenance worker climbs onto a locomotive at the company’s Port Coquitlam yard east of Vancouver, B.C., on Wednesday May 23, 2012. Norfolk Southern Corp.’s board is rejecting a merger proposal from Canadian Pacific Railway. The Virginia-based company says the plan floated by Canada’s second-largest railway is, in its terms, “grossly inadequate.” THE CANADIAN PRESS/Darryl Dyck.

MONTREAL — Your move, Hunter Harrison.

The straight-talking CEO of Canadian Pacific Railway saw his takeover bid for one of the biggest rail companies in the U.S. rejected Friday over concerns it would not secure regulatory approval.

Norfolk Southern also called the US$28 billion offer — which would create the largest railroad on the continent — “grossly inadequate.”

“Our board is really confident in our strategic plan and that it is superior to CP’s inadequate and high-risk proposal,” Jim Squires, chairman and CEO of Norfolk Southern, said Friday during a conference call.

Squires said CP Rail’s short-term, “cut-to-the-bone strategy” doesn’t align with Norfolk Southern’s plan to boost revenues and reduce costs.

Calgary-based CP Rail (TSX:CP), the second-largest railway in Canada, offered US$46.72 in cash plus 0.348 shares in the new company, which would be owned 41 per cent by Norfolk Southern shareholders.

Harrison, who said this week that CP Rail has received positive feedback from the Virginia-based company’s shareholders and shippers, has described the offer as a starting point for further negotiations.

An American by birth, Harrison has a reputation as an efficient railway operator, based on his experience in the U.S. and as a former CEO of Montreal-based Canadian National (TSX:CNR).

CP Rail is now reviewing Norfolk Southern’s statements, company spokesman Marty Cej said.

While Squires declined to indicate if Norfolk’s board of directors would be receptive to an improved proposal, he was doubtful that any transaction could win regulatory approval in the U.S.

“We view substantial regulatory risk and uncertainties that would likely be insurmountable,” he said.

CP Rail said its proposal is aimed at bypassing a congested transportation hub in Chicago. But Squires said CP Rail has overstated the positive impact for the rail industry that such a merger would bring about, adding that CP Rail’s traffic volume is the smallest of any major rail carrier, with less than five per cent of all Chicago traffic.

The combined company would initially have more than 44,000 employees with about 53,000 kilometres of track — greater than the circumference of Earth — stretching from the Pacific to the Atlantic Ocean and south to the Gulf of Mexico.

It is estimated that the merged railway would generate more than $3.1 billion of profits, about twice that of CP Railway, with $21.5 billion in annual revenues.

The new railways would also be less exposed to grain and more heavily weighted to industrial and consumer goods, along with coal.

Ross Marowits, The Canadian Press

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