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CP Rail abandons threat of proxy battle in adjusting Norfolk takeover strategy

MONTREAL – Canadian Pacific Railway is asking Norfolk Southern shareholders to push the U.S. railway’s board to enter into merger negotiations.

Calgary-based CP said Tuesday that instead of launching a proxy battle to elect a slate of sympathetic board members, it has submitted a proposal for a vote at the Virginia-based railway’s next annual meeting.

The last one was held in May.

“We are not asking Norfolk Southern shareholders to vote on the existing proposal; we are simply asking them to vote in favour of having their board talk to us,” CP Rail CEO Hunter Harrison said in a news release.

“We continue to believe in the potential to create a transcontinental railroad with Norfolk Southern and believe this is a fair and measured approach to getting a deal done.”

Norfolk Southern has steadfastly refused to enter into negotiations on CP’s US$30-billion offer as customers voiced their opposition to a deal.

In a statement issued late Tuesday, Norfolk said it believes 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.”

“Notably, CP has not addressed the NS Board’s concerns, nor sought a declaratory order from the Surface Transportation Board that would provide clarity regarding the likelihood of regulatory approval of its voting trust structure,” it added.

Analyst Walter Spracklin of RBC Capital Markets said that while the vote is non-binding, strong support in favour of CP’s motion would send a signal to Norfolk’s board and “likely lead to engagement in talks.”

CP Rail (TSX:CP) signalled a possible change a couple of weeks ago when Harrison criticized interventions by elected congressional leaders and challenged those who claimed CP’s proposed use of a trust was unethical and illegal even though it has been used many times in the past.

Harrison told analysts the company was reviewing its strategy after saying it had failed to anticipate that politics would overtake the regulatory review process.

“If the deck is stacked (against us) and if somebody’s got an ace up their sleeve and are not playing by the rules, then we understand that and we have to adjust accordingly,” he said during a Jan. 21 conference call on CP’s quarterly results.

CP said Tuesday that the cash-and-stock offer would create a company with the potential to grow earnings faster than either railway could achieve on its own, while delivering enhanced service to customers.

“Shareholders and analysts will be watching Norfolk Southern closely throughout 2016 and if they continue to underperform, the pressure to work with CP will only grow,” added Harrison.

While he believes railway mergers will eventually be required to accommodate economic and population growth, Harrison has said CP would also assess whether to abandon its bid and instead focus on repurchasing its shares, which have fallen 35 per cent in the last year.

Canadian Pacific has filed a complaint with the U.S. Department of Justice asking antitrust authorities to look into whether major U.S. railways have conducted an illegal co-ordinated effort to block industry consolidation, including the proposed takeover of Norfolk Southern.