Norfolk Southern Customers Lobby Regulators Against Canadian Pacific Bid

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Industry groups representing major freight customers of Norfolk Southern Corp. have asked the U.S. rail regulator to reject any bid for the railroad by Canadian Pacific Railway Ltd., according to letters viewed by Reuters.

The opposition from a broad array of customers to the hostile bid for the Norfolk, Virginia-based railroad could significantly harm Canadian Pacific's case if an expected lengthy proxy battle is resolved and a merger reaches the Surface Transportation Board for a review.

The Canadian company in mid-November disclosed its $28 billion offer to buy Norfolk Southern. It would be the first merger involving a U.S. railroad since STB rewrote the rules in 2001 after a wave of consolidation reduced the number of major North American railroads to seven from 35.

The proposed merger could face a tough review, and the regulator is expected to give customers even more time than in the past to air concerns at public hearings.

Norfolk Southern has rebuffed several bids from Canadian Pacific since November.

The letters have not been made public, but copies were viewed by Reuters. Sent in December, they express concerns over Canadian Pacific's plans to cut costs at Norfolk Southern would hurt service levels and that a merger would lead to a continental duopoly meaning higher prices for customers.

Norfolk Southern declined to comment on the letters.

A Canadian Pacific spokesman said the company "is aware of some shipper concerns" but looks forward to discussing the benefits of its bid with all stakeholders.

The documents also include letters from representatives of several state legislatures expressing opposition to the deal.

The letters include a joint one to Canadian Pacific, with STB carbon-copied, from the heads of the Alliance of Automobile Manufacturers and the Association of Global Automakers — which between them represent large automakers and suppliers including General Motors Co. and Toyota Motor Corp.

A large proportion of finished vehicles travel most of the way by train from U.S. manufacturing plants to dealerships.

"Previous rail mergers of this magnitude have been followed by prolonged periods of poor service levels and higher rates," the joint letter dated Dec. 22 states. "We urge CP to abandon its merger ambitions and to focus its attentions upon enhancing its current levels of customer service."

Major rail mergers in the 1990s, such as the 1999 carve-up of Conrail between Norfolk Southern and CSX Corp., resulted in short-term collapses as railroads failed to integrate their networks smoothly.

In a separate letter, Subaru Motor Co. said it opposed a merger "as we believe it would limit the competitive balance" among North America's railroads.

The manufacturers' associations of Kentucky, Indiana and West Virginia also wrote to STB, as did the Michigan Agri-Business Association and the Palmetto AgriBusiness Council, which represents farmers, banks and agricultural investors in South Carolina.

"We are justifiably concerned that Canadian Pacific’s proposal to slash resources available to the current Norfolk Southern threatens the economy of our state," Charles Higdon, chief executive of the Kentucky Association of Manufacturers, wrote to STB on Dec. 22.

In a letter dated Dec. 8, Ernie Thrasher, CEO of Xcoal Energy & Resources, wrote he was "concerned that the short-term nature of CP's operating plan would be detrimental to the long-term requirements of the U.S. coal industry and energy sector."

In a Dec. 23 letter to STB, the head of shortline railroad holding company Watco cautioned that many in the rail industry expect the next round of mergers will be the last.

"The proposed CP-NS merger likely would result in a national duopoly, which would dramatically reduce competitive rail options for customers," Watco CEO Rick Webb wrote.