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November 17, 2015 5:30 PM, EST

Norfolk Southern Weighing $28.1 Billion Canadian Pacific Bid

First Rail Merger Proposal Since 1999
EarlRShumaker/Flickr
Norfolk Southern Corp. said it is considering an  acquisition offer by Canadian Pacific Railway Ltd., worth at least $28.1 billion, that represents the first rail merger proposed since 1999.

The Canadian carrier, in a statement said its offer would lead to “a pro-competitive, pro-customer, coast-to-coast transportation solution” that would lower costs, boost earnings and enhance service.

The last tie-up proposed, a combination of BNSF Railway and Canadian National Railway, was abandoned after opposition from regulators, shippers and rival railroads.  The latest proposal would bring together Canada’s second-largest railroad with the No. 2 carrier in the eastern United States, creating a company with annual revenue of about $16 billion, 37,000 miles of track, more than 40,000 workers and profit before interest and taxes of more than $5 billion.

“The company’s board of directors, in consultation with its financial and legal advisors, will carefully evaluate and consider this indication of interest in the context of Norfolk Southern’s strategic plans, and its ongoing review of opportunities to enhance stockholder value through strategic, financial and operational measures and pursue the best interests of the company and its stockholders,” the Virginia-based company’s statement said. “Notably, any consolidation among Class I railroads in North America would face significant regulatory hurdles.”

Norfolk Southern’s letter didn’t specify the hurdles, but the 1999 deal was scuttled after opposition from other railroads and from shippers, which could surface again based on analysts’ surveys and commentary. In addition, the Surface Transportation Board, which would have to approve the new proposal, created rules in 2001 that were intended to make future acquisitions more difficult.

The Canadian carrier’s lines stretch across that nation, with extensions into the United States to reach Chicago, and a limited network in the Northeast, where Norfolk also operates. Norfolk’s routes cover every state east of the Mississippi River and cross that waterway to Kansas City, Missouri.

“A combined entity will also lead to faster growth … versus what either of us would be able to achieve on our own”, the Calgary, Alberta-based company’s letter said. It also cited potential improvements in service at bottlenecks such as Chicago.

Benefits cited in the CP letter included $1.8 billion in future “operating synergies” that could lead to a 45% increase in earnings on a per-share basis. Other identified advantages included global presence at ports on the Pacific, Atlantic and Gulf coasts.

In a Nov. 18 statement, the Canadian company cited misconceptions in the Norfolk Southern description of the proposal as “highly low premium”. NS didn’t say when it would respond to the offer.

The Feb. 13 letter from CEO E. Hunter Harrison to Jim Squires, his NS counterpart, offers $46.72 in cash and a fixed exchange ratio of 0.348 Canadian Pacific shares per Norfolk Southern share. At the time of Harrison’s letter, the offer was worth about $93 per share. Based on 302.5 million shares outstanding, the offer is worth $28.1 billion.

NS said that offer was a premium of of less than 10% based on the Nov. 17 closing price, which was $86.97 per share. Canadian Pacific, which called its offer premium “sizable” noted that the value of NS shares has appreciated in recent days after reports a merger was in the works.

The Norfolk Southern move is Harrison’s latest acquisition gambit. Less than a year ago, he made overtures to CSX Corp., which rejected them. No formal offer was extended.

Harrison also was involved in the failed 1999 deal, when he was a top official at Canadian National. He retired from that company in 2009 and returned to the industry in 2012 after investor William Ackman led a successful fight to oust previous CP management.