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April 7, 2016 3:10 PM, EDT

US Army Takes Aim at Canadian Pacific, Norfolk Southern Railroad Merger Plan

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The U.S. Army said a Canadian Pacific Railway takeover of Norfolk Southern Corp. has the potential to harm national defense, adding opposition to the possible merger plan.

The Army told the Surface Transportation Board that it opposed Canadian Pacific’s plan to have CEO Hunter Harrison step down and become the head of Norfolk Southern as part of a voting trust structure before the regulator’s final approval of a merger. Canadian Pacific has asked the board to rule by May 6 if its voting-trust plan is permissible.



“We are troubled by the possibility that Mr. Harrison could become a senior executive at Norfolk Southern in advance of the board ruling in favor of common control/merger between Canadian Pacific and Norfolk Southern,” according to a letter from the Army. “If Mr. Harrison is a senior executive at NSR he may be placed in a position where he must make business decisions with potentially competing interests.”

Canadian Pacific wants to acquire Norfolk Southern, the second-largest eastern U.S. railroad, to create a coast-to-coast railroad that it says will benefit shippers by reducing costs and congestion. Norfolk Southern has rebuffed three offers, including one in December that valued the company at $27 billion, as “grossly inadequate,” while expressing concerns the regulator would reject a tie-up.

The Surface Transportation Board will accept comments on the plan until May 8, and Canadian Pacific will have until April 13 to reply to those.

“We look forward to providing a fulsome response at that time,” said Martin Cej, a spokesman for the Canadian railroad.

Bill Ackman, whose Pershing Square Capital Management is the second- largest shareholder of Canadian Pacific, with a 9.1% stake, has advocated for the merger during conference calls with analysts and investors.

There are 36,000 miles of rail lines that are designated to move defense cargo throughout the United States “in peace and war,” said the letter, signed by David Dorfman, a senior civil engineer for the Railroads for National Defense Program. The Surface Transportation Board has given interested parties until April 8 to submit commentary.

“It is too early to determine whether either a CPRL+NSR merger itself, or a downstream merger involving other major railroads, would degrade national defense,” the letter said.

“However, the potential certainly exists for either the CPRL+NSR merger or a downstream merger to adversely affect national defense.”

The Army joins lawmakers, including U.S. House Transportation Committee Chairman Bill Shuster, and shippers such as UPS Inc. and FedEx Corp. that have raised concern about the merger.

Canadian Pacific has received support for its plans from dozens of shippers, including the Canadian unit of Kia Motors Corp.