CP-NS combination would not trigger future North America merger activity, CP said

A merger between Canadian Pacific Railway (CP) and Norfolk Southern Corp. (NS) would not force other U.S. railroads to merge in order to remain competitive, CP said Wednesday.

In a white paper posted on its web site, Calgary-based CP said that BNSF Railway Co. and Union Pacific Corp. (UP), the two U.S. western railroads, would be larger than a combined CP-NS railroad. As a result, there would be "no pressure" on other carriers to merge in response to the deal, CP said.

Top executives of Omaha-based UP and Fort Worth, Texas-based BNSF have said that they would strongly consider merging with other carriers should NS' board and shareholders approve CP's offer and the Surface Transportation Board (STB), the U.S. regulatory agency that oversees rail mergers, approve CP's plan to put itself in a voting trust. The aim of the trust would be to insulate CP from control of NS while the agency evaluates the combination. Under the voting-trust proposal, E. Hunter Harrison, CP's CEO, would move over to run NS.

The obvious first target of the western railroads would be Jacksonville-based CSX Corp., the other Class I eastern railroad. There has been no public discussion of either BNSF or UP making a counter-offer for Norfolk, Va.-based NS.

Under revised merger rules imposed in 2001 by the STB, merger applicants are required to discuss so-called "downstream effects" of a combination, or the potential impacts stemming from any future hypothetical mergers. STB has said the discussions are designed to help it develop a set of guiding principles for analyzing all future rail mergers, which, with only seven Class I North American railroads left, would effectively constitute a final round of the venerable business.

One of the concerns raised in the wake of CP's $28 billion cash-and-stock bid for NS is that it would trigger a burst of merger activity that could wreak havoc on network operations and dramatically impair service to shippers. There has not been a merger proposal of Class I carriers since 1999, when Canadian National Railway and BNSF proposed to merge. The deal was scuttled after the courts upheld the STB's power to impose more stringent standards.

Canadian Pacific has made three offers for Norfolk Southern, all of which NS' board has rejected. It has been rumored that William A. Ackman, whose hedge fund Pershing Square Capital is CP's largest shareholder, would launch a proxy fight for Norfolk Southern if its board spurned CP for a third time. No such battle has yet been initiated.