Norfolk Southern hostile to Canadian Pacific's $28.4 billion bid

Wed Nov 18, 2015 1:24pm EST
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By Greg Roumeliotis

(Reuters) - U.S. railroad operator Norfolk Southern Corp (NSC.N: Quote) all but rejected a $28.4 billion acquisition offer by Canadian Pacific Railway Ltd (CP.TO: Quote) on Tuesday, calling it "low-premium" and warning it would face significant regulatory hurdles.

While Norfolk Southern said it would carefully evaluate the offer, its sour response represents a setback to Canadian Pacific as well as its largest shareholder, William Ackman's activist hedge fund Pershing Square Capital Management LP.

Ackman, a big advocate of consolidation in the North American railway sector, recruited Hunter Harrison, who had previously been chief executive officer of Canadian National Railway Co (CNR.TO: Quote), as CEO of Canadian Pacific in 2012.

In a statement earlier on Tuesday announcing its offer to Norfolk Southern, Canadian Pacific argued that the combined railroad would offer unparalleled customer service and competitive rates for shippers, and that it would satisfy the U.S. Surface Transportation Board (STB) and Canadian regulators.

The STB has a public interest test when considering whether to approve mergers, so a deal would not only have to address antitrust concerns but also result in improved service, economic efficiencies and public safety for those using the railways.

Yet not only has Canadian Pacific failed to convince Norfolk Southern that the merger could receive regulatory clearance, it has offered no protection for Norfolk Southern shareholders in the event the deal would be blocked, according to a source who asked not to be identified because details of the discussions are not public.

The first time Canadian Pacific contacted Norfolk Southern about the deal was after a Bloomberg News report on Nov. 9 that cited people familiar with the matter who said the two companies had held early-stage merger talks, the Reuters source added.

Norfolk Southern Chief Executive James Squires subsequently met with Harrison in Florida last week to discuss the potential merger, according the source. Squires told Harrison he viewed the regulatory obstacles as insurmountable and that Norfolk Southern had a plan of its own to drive shareholder value, the source added.   Continued...