(Reuters) - U.S. railroad operator Norfolk Southern Corp (NSC.N) said on Friday its board had rejected Canadian Pacific Railway Ltd's (CP.TO) $28.4 billion offer, calling it "grossly inadequate" and could face substantial regulatory hurdles.
A struggling coal transportation market, suppressed by weak market demand and global oversupply, has weighed on the earnings of Norfolk, making it more vulnerable as a takeover target. But on Friday the company put forward a passionate defense of why it should go it alone.
"The board believes that Canadian Pacific's proposed transaction is opportunistically timed to take advantage of Norfolk Southern's market valuation," Norfolk Chief Executive James Squires said on a conference call with analysts.
He added that the regulatory hurdles would remain the same "at any offer price".
Canadian Pacific said late on Friday it was disappointed with Norfolk's rejection of its proposal, and reiterated that it was committed to the deal and looked forward to engage with Norfolk's leadership and its shareholders.
The company did not say whether it would raise its offer, a move Canadian Pacific Chief Executive Hunter Harrison has previously said the company might need to do to win over Norfolk.
Canadian Pacific said it would hold a conference call on Dec. 8 to discuss "clarity, context and detail" of its offer and "correct every inaccuracy."
Norfolk's shares have fallen 16 percent this year, in tandem with other U.S. railroad stocks that have been hurt by a fall in high-margin coal shipments and weak oil prices. They closed down 1.1 percent at $92.06 on Friday. Canadian Pacific closed down 4.1 percent at C$180.15.
Canadian Pacific first made its offer for Norfolk public on Nov. 17, but met with an unenthusiastic response from Norfolk.
Norfolk's rejection is a blow for Bill Ackman's activist hedge fund Pershing Square, the largest shareholder in the Canadian company with a 9.1 percent stake.
Ackman, a big advocate of consolidation in the North American railway sector, is under pressure because a plunge in the stock price of Valeant Pharmaceuticals International Inc (VRX.TO) - another important holding - has left Pershing with considerable losses.
Pershing declined to comment on the Norfolk bid.
Canadian Pacific's railroads are just north and south of the U.S.-Canada border and generally run east to west, while Norfolk's routes are up and down the U.S. east coast.
Canadian Pacific has said the combined railroad network would offer competitive rates for shippers and $1.8 billion annual savings for the two companies.
Canadian Pacific has said the merger would satisfy the U.S. Surface Transportation Board (STB) and Canadian regulators, an idea Norfolk has summarily dismissed.
"Even in the unlikely event of approval, Norfolk Southern would be in limbo for this extended period, causing loss of momentum and disruption to our business and operations," Norfolk CEO Squires said.
The STB has a public interest test when considering mergers. A deal would have to result in improved service, economic efficiencies and public safety.
Canadian Pacific will now likely take the offer directly to Norfolk's shareholders, FirstEnergy Capital analyst Steven Paget said.
Asked about whether Norfolk had the backing of its top shareholders, Squires told Reuters in an interview that the company had investor support for its revenue growth initiatives that focus on faster railways and superior customer service.
"We obviously factored in our shareholders' view in considering the proposal that we rejected today. We know that our shareholders expect value creation from us. We have a new team in place with a plan to improve our performance and drive shareholder value," Squires said.
Reporting by Ankit Ajmera and Sneha Banerjee in Bengaluru; Additional reporting by Svea Herbst-Bayliss in Boston and Greg Roumeliotis in New York; Editing by Shounak Dasgupta, Sayantani Ghosh and Bernard Orr