April 7, 2016 / 7:42 PM / in 2 years

U.S. military: CP, Norfolk Southern merger could affect defense

CHICAGO (Reuters) - The U.S. military on Thursday raised concerns with a federal rail regulator over the voting trust Canadian Pacific (CP.TO) has proposed as part of its takeover bid for Norfolk Southern (NSC.N) and said the deal could adversely affect the country’s national defense.

Canadian Pacific Railway crews drive past trains at the CP Rail yards in Calgary, Alberta, April 29, 2014. REUTERS/Todd Korol

In a letter to the U.S. Surface Transportation Board (STB) dated April 7, the Department of Defense said CP’s proposal to have its chief executive, Hunter Harrison, run Norfolk Southern as part of the voting trust “could prove to be untenable due to the appearance of common control” of the two railroads.

CP, which is Canada’s second-largest railroad, disclosed a $28 billion offer for Norfolk Southern in mid-November. The Calgary-based company has said a merger would result in savings of more than $1.8 billion annually.

Norfolk Southern has rebuffed all advances from CP.

The letter comes as a response to a March 2 petition from CP to the STB seeking a “declaratory order” on its voting trust proposal. The idea would be to place both railroads in a trust - if they agreed to merge - pending a review by the STB. Under the STB’s merger rules, common control is not allowed.

The Department of Defense said putting Harrison, a septuagenarian railroading legend, at the helm of Norfolk Southern while a review was underway would put him in a position in which he “must make business decisions with potentially competing interests.”

The Department said in the letter that “it is too early to determine” whether a merger would degrade national defense, but said “the potential certainly exists.”

Under the rules for a voting trust for a major railroad merger, there may be no collusion, joint decision-making or any other form of common control prior to regulatory approval. The two must continue to operate as separate entities until a merger gets the green light.

A spokesman for CP said the railroad looks forward to “providing a fulsome response” at the proper time to the department’s comments.

The U.S. military relies on rail networks to move defense-related cargo across the country, both during peace and times of war.

A number of major rail customers have recommended against any merger, citing concerns that CP’s plans to cut costs at Norfolk Southern would gut the railroad and harm service. They include package delivery company United Parcel Service Inc (UPS.N), the single biggest customer of the major U.S. railroads.

Some U.S. politicians have also spoken out against a merger. Earlier this week, the chairman of the U.S. House Transportation and Infrastructure Committee said he did not believe a merger was in the interests of the U.S. freight transportation system.

Reporting By Nick Carey; Editing by Dan Grebler

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