CP Canadian Pacific Kansas City Limited

By Jacquie McNish and Laura Stevens 

Canadian Pacific Railway Ltd. backed away from a threatened proxy battle to unseat Norfolk Southern Corp. directors, opting to enlist the Virginia rail operator's shareholders to press the board for friendly merger talks.

Canadian Pacific said it would submit a nonbinding resolution to the company's coming shareholders' meeting calling for the board to start negotiations. The Calgary, Alberta-based railway has been surprised by the force of opposition to the deal, according to a person familiar with its plans.

"We believe this shareholder resolution is the clearest, fairest approach to a process that will result in an outcome beneficial to all stakeholders," Canadian Pacific said in a statement on Tuesday.

Norfolk Southern said it wouldn't support further discussions barring a new offer with "compelling value" and that addresses regulatory issues.

The Norfolk, Va., company's stock rose 1%, or 93 cents, to $71.42, and Canadian Pacific gained nearly 2% to $124.10, both in 4 p.m. New York trading on Tuesday.

Canadian Pacific's retreat from pursuing a hostile takeover reflects its dwindling options after a three-month campaign that has failed to draw wider support. Its bid is backed by activist investor William Ackman, who sits on the Canadian railroad's board and whose hedge fund owns about 9% of its shares.

Norfolk Southern's board has dismissed the hostile bid as inadequate and unlikely to win approval of regulators in a process that is expected to last years.

Since Canadian Pacific first announced a cash-and-stock merger offer in November, Norfolk Southern has refused to engage in discussions. A number of shippers, other large rail operators and politicians have lined up against the proposal.

Canadian Pacific's move for shareholder support was seen by analysts as an acknowledgment that a combination with Norfolk is unlikely unless negotiated on friendly terms with Norfolk. Its complex merger proposed includes an interim trust structure that would operate during a lengthy regulatory review.

"I think it speaks to CP realizing the importance of a transaction being as friendly as possible," said Justin Long, an analyst for investment bank Stephens Inc.

The continuing pursuit of a merger reflects a belief that it can wring greater support from some Norfolk Southern's holders that have expressed disappointment with its high ratio of operating costs to revenue, and revive the struggling business.

"Shareholders and analysts will be watching NS closely throughout 2016 and if they continue to underperform, the pressure to work with CP will only grow," Canadian Pacific Chief Executive Hunter Harrison said in a statement.

Canadian Pacific has filed a complaint with the U.S. Department of Justice alleging that some of its competitors have colluded to block its bid that would create the country's first transcontinental railway.

The bid initially was valued at $30 billion and has since declined in value to about $27.7 billion amid a commodity slump that has depressed railway stocks.

Write to Jacquie McNish at Jacquie.McNish@wsj.com and Laura Stevens at laura.stevens@wsj.com

(END) Dow Jones Newswires

February 09, 2016 18:51 ET (23:51 GMT)

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