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CP Rail slams Norfolk Southern over 'mischaracterization' of its takeover offer

MONTREAL – A proposal by Canadian Pacific Railway to create the largest railroad in North America took a testy turn Friday after the company accused Norfolk Southern of mischaracterizing the takeover deal.

The Calgary-based railway said it was disappointed that Norfolk Southern, one of the biggest rail companies in the U.S., rejected its US$28 billion offer.

“CP takes exception to the claims, misdirection and mischaracterization of its offer and the benefits such a combination would provide to customers, shareholders, the industry and the public,” CP Rail said after markets closed.

CP Rail plans to hold a conference call Tuesday to respond in greater detail and “correct every inaccuracy” raised by Norfolk Southern about obtaining regulatory approval.

Norfolk expressed doubt that the deal would clear regulatory hurdles in dismissing the unsolicited offer on Friday. The Virginia-based railway also called the offer “grossly inadequate.”

“Our board is really confident in our strategic plan and that it is superior to CP’s inadequate and high-risk proposal,” Jim Squires, chairman and CEO of Norfolk Southern, said Friday during a conference call.

Squires said CP Rail’s short-term, “cut-to-the-bone strategy” doesn’t align with Norfolk Southern’s plan to boost revenues and reduce costs.

CP Rail (TSX:CP), the second-largest railway in Canada, offered US$46.72 in cash plus 0.348 shares in the new company, which would be owned 41 per cent by Norfolk Southern shareholders.

CEO Hunter Harrison, who said this week that CP Rail has received positive feedback from the Virginia-based company’s shareholders and shippers, has described the offer as a starting point for further negotiations.

An American by birth, Harrison has a reputation as an efficient railway operator, based on his experience in the U.S. and as a former CEO of Montreal-based Canadian National (TSX:CNR).

While Squires declined to indicate if Norfolk’s board of directors would be receptive to an improved proposal, he was doubtful that any transaction could win regulatory approval in the U.S.

“We view substantial regulatory risk and uncertainties that would likely be insurmountable,” he said.

CP Rail said its proposal is aimed at bypassing a congested transportation hub in Chicago. But Squires said CP Rail has overstated the positive impact for the rail industry that such a merger would bring about, adding that CP Rail’s traffic volume is the smallest of any major rail carrier, with less than five per cent of all Chicago traffic.

The combined company would initially have more than 44,000 employees with about 53,000 kilometres of track — greater than the circumference of Earth — stretching from the Pacific to the Atlantic Ocean and south to the Gulf of Mexico.

It is estimated that the merged railway would generate more than $3.1 billion of profits, about twice that of CP Railway, with $21.5 billion in annual revenues.

The new railways would also be less exposed to grain and more heavily weighted to industrial and consumer goods, along with coal.