Harrison: CP to abandon NS takeover bid if resolution fails

Parcel giant UPS has joined the chorus of voices opposing a tie-up between Canadian Pacific and Norfolk Southern, sending a letter to the U.S. Surface Transportation Board that says a merger would hurt intermodal service levels and increase costs.    Canadian Pacific Railway may abandon its highly publicized takeover attempt Norfolk Southern Corp. if shareholders of the number four U.S. railroad vote in opposition of a non-binding resolution put forth by CP earlier in the week.
   Mark Levin, an analyst with BB&T Capital Markets, asked CP CEO E. Hunter Harrison in an interview at the BB&T Corp. Transportation Services Conference in Coral Gables, Fla. if a failure to pass the shareholder resolution would “mark the end” of the acquisition process.
   “Yeah, I think so. I think it would be, unless there are some other extenuating circumstances that change that I’m not aware of,” said Harrison, according to a transcript of the event. “I think that we’re making preparation that if we’re not successful in entering a dialog that we’re going to go back and focus on running a hell of a CP railroad.”
   NS has since last November rejected three separate stock-and-cash offers from CP, deeming the estimated $30 billion bids – which, according to a report in the Wall Street Journal have since depreciated to $27.7 billion thanks to a commodity slump that has hurt the stock value of both railways – deeming them “grossly inadequate” and unlikely to win regulatory approval from the U.S. Surface Transportation Board (STB).
   Harrison had previously indicated the company would be willing to engage in a proxy fight to install new management at NS, but earlier this week, CP shifted its tactics, submitting a resolution to NS shareholders to ask the railroad’s board of directors to enter into good faith negotiations regarding a merger.
   At the conference, Harrison said a proxy battle would not be in the best interests of either railroad.
   “We were going to clearly try to take this message to the shareholder – which is where it belonged,” he said. “And some interpreted, I think as a proxy fight or battle, which is not what we want to see. Those are costly and they don’t produce a lot of value, they don’t create the kind of environment that you would like to set up to be able to do a transaction.
   “So, we’ve taken maybe a little bit different approach, and I guess we announced last night that we’re going to ask for a resolution to be put on the ballot that would give shareholders an opportunity to vote – non-binding vote to say to the management of NS, talk to these people and that’s all it is.
   “There’s no language that talks about, we’re going to enhance the offer, or what the deal is subject to. It’s just enter a dialogue; which we think is pretty reasonable.”
   Harrison also made reference to an inquiry CP made last month to the U.S. Department of Justice about what it called a “collective campaign” by North America’s other Class I railroads to block its attempts to acquire NS.
   “Now maybe they think that’s the right thing, I don’t,” he said. “But as I think I mentioned earlier, we’ve raised issues with Justice because we think and I’m certainly not a lawyer, but I spent quite a lot of time through the years on this that if four railroads got together and had a discussion, I don’t care what counts or not about how to stop mergers or to preserve some of these things, that’s wrong. One said that they would and I’m paraphrasing here, they would do everything in their power to stop mergers.”
   Harrison said he thinks the rail industry has become complacent in recent years when it comes to competition, or as he put it, “maybe the industry has gotten a little fat and sassy.” CP has repeatedly argued a deal would enhance competition, as well as increase service levels, but NS has been steadfast in its resistance.
   “NS has already met with CP and publicly provided clear detail regarding the NS Board’s concerns,” the Norfolk, Va.-based railroad said in a statement regarding CP’s proposed shareholder resolution. “While CP continues to publicly declare that NS should ‘talk to CP about a potential combination,’ we believe further discussions are not in the best interests of NS shareholders unless CP offers NS shareholders compelling value and addresses the regulatory issues inherent in its proposal.”
   Meanwhile, parcel giant UPS has joined the chorus of voices opposing a CP-NS merger, which in addition to other Class I railroads like CSX Corp., Union Pacific Corp. and BNSF Railway, includes members of Congress, rail unions and even NS customers.
   According to a report from the Wall Street Journal, UPS sent a letter to the STB saying a merger could trigger further consolidation, echoing comments made by BNSF CEO Matt Rose in an interview at the Stifel Transportation and Logistics conference in Miami earlier this week.
   “UPS is concerned that this combination would lead to diminished rail intermodal service levels and increased costs for all segments of rail customers,” the company added.