Canadian Pacific proposes Norfolk Southern merger

OREANDA-NEWS. November 19, 2015. Canadian Pacific (CP) has offered to buy eastern US railroad Norfolk Southern (NS) for an undisclosed price, a merger that would create a new transcontinental railroad and re-shape the competitive landscape among Class I carriers.

CP said today it sent an offer letter to NS that includes a "sizable" cash premium, as well as stock. CP said the merger would create a new carrier that would be more profitable than each railroad on its own.

But the deal will require a number of regulatory approvals in both countries.

"CP strongly believes that the combined railroad would offer unparalleled customer service and competitive rates that will support the success of the shippers and industries it serves, and satisfy the US Surface Transportation Board and Canadian regulators," CP said.

CP said that among its new innovations would be allowing other carriers to service shippers on its tracks if the new railroad fails to provide adequate service or competitive rates.

The National Industrial Transportation League has urged the Surface Transportation Board to implement just such a "reciprocal shipping" policy.

CP also has proposed allowing shippers to choose where they can connect with another railroad along its network,eliminating "bottleneck pricing."

The merger likely would alleviate chronic rail congestion around Chicago by funneling traffic through under-utilized hubs, improving capacity and competition,CP said.

CP said it 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."

NS did not immediately respond to a request for comment, and CP's Canadian competitor Canadian National declined to comment on the proposed merger.

Another US Class I carrier, Union Pacific (UP), told Argus it does not think the sale will be approved.

"We do not think mergers make sense at this point in time, especially in this environment," UP said. "We believe the regulatory hurdles for future consolidation would be significant."

The Surface Transportation Board has made it clear that future railroad mergers would have to enhance competition and operating efficiency.

"All of this would be disruptive and not in the best interest of our customers or shareholders," UP said.