Tuesday, April 12, 2016

Intermodal Bid by Rail Freight Group Fails to Impress Regulators

Collapse of Major Merger Once Again
Shipping News Feature
CANADA – US – After five months of negotiations, three failed bids, and a rejection from the Department of Justice (DoJ), Canadian Pacific Railway (CP) has now terminated its efforts to merge with Norfolk Southern (NS). CP CEO Hunter Harrison has long been a proponent of a major tie up in the North American rail freight sector and with this failed bid, the first offer estimated to be in the region of $28.4 billion, the Canadian intermodal operator will find it more difficult in its attempts to rebuild the industry to its liking, having already ended previous talks with CSX in 2014 stating that the ‘two companies saw the world a little differently’.

CP proposed the creation of what it sees as a true end-to-end railroad that would enhance competition, ease freight congestion, both now and for the future, improve service to shippers, better support the economy and generate significant shareholder value for both companies. Speaking of the decision to end the merger attempt, Harrison said:

"We have long recognised that consolidation is necessary for the North American rail industry to meet the demands of a growing economy, but with no clear path to a friendly merger at this time, we will turn all of our focus and energy to serving our customers and creating long term value for CP shareholders."

Last week, the Department of Justice filed a reply in opposition to CP's petition for a declaratory order regarding use of a voting trust pending the Surface Transportation Board’s (STB) review of the merger. The reply stated that the proposed voting trust would fail to preserve the independence of the merging railroads during the period taken for the transaction’s regulatory review and would risk harm to current and future competition. The DOJ urged the STB to reject the proposed voting trust structure or, in the alternative, to deny the request for a declaratory order. Assistant Attorney General Bill Baer of the Justice Department’s Antitrust Division, commented:

“Canadian Pacific’s voting trust proposal would compromise Norfolk Southern’s independence and effectively combine the two railroads prior to completion of the STB’s review. That makes no sense. We urge the STB to preserve its ability to review the impact of the proposal on competition and consumers before Canadian Pacific starts scrambling the eggs.”

Under the voting trust structure, Canadian Pacific Railway Limited (CPRL) would have acquired NS with CP’s stock placed in trust, and CP’s current CEO becoming CEO of NS. The DOJ explained in the filing in its view this proposed voting trust structure fails under each prong of the STB’s regulatory requirements.

It was judged that the proposal failed to preserve the independence of NS and CP, additionally both CP and NS would have the economic incentives and the ability to align their business strategies before a review of the transaction. Finally, once in place the proposal would also make it difficult, if not impossible, to effect a successful divestiture if the STB were to reject the merger applications.