By Ben Dummett And Tripp Mickle
Canadian Pacific Railway Ltd.'s proposal to buy Norfolk Southern
Corp. for about $28 billion would create a rail network stretching
across most of North America.
But the pact would need to satisfy the U.S. Surface
Transportation Board's rules on mergers--and that could be a tough
sell.
The rules, which were passed in 2001 following decades of
industry consolidation, required future merger applicants "to bear
a heavier burden to show that a major rail combination is
consistent with the public interest" by enhancing competition.
CP would have to submit a tower of paperwork including a
so-called "Service Assurance Plan" providing information on how the
companies would be integrated, including training plans,
information technology systems, service disruption contingencies,
labor issues and other matters.
Experts estimate that approval would take a minimum of 18 months
and could take even longer because of the size and scope of the
deal.
The regulator wouldn't only review the CP-Norfolk Southern
merger but also evaluate whether or not it would trigger further
industry consolidation, seeking to ensure the merger isn't the
first step to a world where only two or three transcontinental
railroads remain in North America.
Even so, a deal would likely spur others. "There would be a
temptation for other railroads to merge," said Steven Ditmeyer, a
former federal railroad official who teaches railway management at
Michigan State University. He thinks companies like CSX Corp. and
Canadian National Railway Co. would also explore a merger to remain
competitive.
Rail competitors CSX, BNSF Railway Co. and Canadian National
Railway declined to comment on the potential merger.
In an email, a spokesman for Union Pacific Corp.--another major
competitor--said, "We oppose rail industry mergers, generally, and
believe the regulatory hurdles for future consolidation would be
significant."
To try to pre-empt competition concerns, CP said the combined
railroad company would allow other railroads to operate on its
tracks and in its terminals if the merged company couldn't provide
adequate service or competitive prices. CP said it also would give
shippers the choice of where they could connect with other
railroads on its network.
The so-called open access plan is something competing railroads
have opposed and would likely spark opposition to this deal, said
Anthony Hatch, a railroad analyst with ABH Consulting.
He added that the plan would reduce incentives for railroad
companies to invest in their infrastructure, which could be
problematic for regulators.
"Why would you build a new terminal if you thought someone else
would use it?" Mr. Hatch said. "The answer, as we've seen around
the world, is you won't."
Calgary, Alberta-based CP--which hasn't launched a formal
bid--is offering $46.72 in cash and 0.348 share of the merged
company for each share of Norfolk Southern.
Norfolk Southern, based in Norfolk, Va., has said it would
evaluate the bid, describing it as an "unsolicited, low-premium,
nonbinding and highly conditional indication of interest."
The two sides differed on the value of CP's proposal, signaling
that they are far apart on a potential combination. CP, in a letter
to Norfolk Southern that was made public Wednesday, said a merger
would allow the companies to achieve more than $1 billion in cost
savings, boosting the ultimate value of the deal to as much as
$42.64 billion.
Norfolk said the stock component of the offer is based on CP's
share price, which would put the value of the offer much lower.
CP's stock rose 5.8% to $146.65 Wednesday, while Norfolk
Southern gained 6.4% to $92.49.
CP made its proposal public after a meeting last week between
its chief executive, Hunter Harrison, and Norfolk Southern CEO
James Squires, at which CP got a cool reception, according to a
person familiar with the matter.
According to a person familiar with the matter, CP is making the
move in part because it believes its management could greatly boost
the margins at Norfolk, along the same lines that Mr. Harrison has
done since taking over CP in 2012.
That followed a successful proxy battle by New York activist
investor William Ackman to replace directors and management at CP,
one of Canada's oldest and most storied companies.
Mr. Harrison, who said in July he plans to retire in 2017 at the
end of his current contract, believes he can get to a combined
operating ratio in the mid-50% level, compared with Norfolk's
approximately 70% ratio at this point, the person said.
The lower a railroad's operating ratio, the more efficiently it
runs and the more profitable it can be.
David Benoit contributed to this article.
Write to Ben Dummett at ben.dummett@wsj.com and Tripp Mickle at
Tripp.Mickle@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
November 18, 2015 19:49 ET (00:49 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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