Canadian Pacific (CP), with operations in the US and Canada, has announced its desire to merge with Norfolk Southern. Their proposal to create a transcontinental railroad they said would enhance competition and creating significant shareholder value. CP claims to have offered “a sizable premium” but so far Norfolk Southern isn’t buying it.
Alberta-based CP sent Norfolk Southern a letter detailing its desire to merge outlining a deal which included premium in both cash and stock.
Norfolk Southern responded in a statement saying the proposal was “unsolicited, low-premium, nonbinding and highly conditional indication of interest” from Canadian Pacific in relation to a merger.
It also revealed in a statement that Canadian Pacific was offering Norfolk Southern shareholders $46.72 in cash and 0.348 Canadian Pacific shares for every Norfolk Southern share they own.
CP is said to believe that the two companies could work together producing faster earnings growth.
While Norfolk Southern said it was considering the offer, it did express concerns over cross-country boundaries.
“Any consolidation among large freight railroads would face significant regulatory hurdles.”
While it may be true, CP is said to have addressed those in its letter to the company. However, scrutiny of such a deal would be high, given real concerns about the possible erosion of competition. The U.S. Surface Transportation Board has been known to intervene in mergers that could lead to a railroad ownership monopoly and in general regulators don’t go in for North American rail mergers.
This hasn’t deterred CP though. It has indicated that it would let other railroads use its tracks and terminals as an alternative. In addition, the new company would give shippers the choice of where they can connect with another railroad along its network, bringing an end to the practice of "bottleneck pricing" to a large number of shippers in the U.S. while further enhancing competition. Furthermore, CP says a railroad combination would alleviate the long-standing issue of congestion in Chicago.
In a press release the railroad giant CP said: “CP hopes the NS executive leadership team and the Board of Directors give this offer due consideration, and looks forward to a thoughtful dialogue on creating a new industry leader.”
If it were to go head, together it is thought that the merger would mean a combined market value of about $47 b with a rail network owned by a single giant that would span from Canada to the gulf of Mexico.