North American Rail Freight Consolidation Move Takes Another Twist

US – CANADA – Consolidating the North American rail freight market is still the number one priority for Canadian Pacific (CP), as after months of negotiation and carefully worded press releases and even a dedicated website, Canadian Pacific has directly appealed to the US Surface Transportation Board (STB) petitioning for a declaratory order seeking confirmation on the viability of the voting trust structure CP has suggested as part of its proposed merger with Norfolk Southern (NS). Hunter Harrison, CP's Chief Executive Officer said:

"Shareholders of both CP and NS have asked that we seek this declaratory order as a means to better understand the STB's views on the proposed voting trust model ahead of any formal application and we have listened to the owners of our respective companies.

"Since we remain convinced that productive discussions about the potential structure and value of a formal bid must take place face to face we hope this show of good faith is met with an equal demonstration on the part of NS.”

Earlier this month, CP submitted a resolution to NS shareholders to ‘compel’ their board of directors to meet with CP to discuss a transaction. CP says that it is confident that such a combination would create a ‘true end-to-end transcontinental railroad that would enhance competition, benefit the public and drive economic growth’. The NS Board has so far been reluctant to agree to any sort of combination refusing several offers stating that the offers have been inadequate and that a merger would a be risky endeavour.

While the declaratory order presents a hypothetical proposed trust, outside the established STB procedure for seeking formal trust approval, CP is hopeful that the STB will be able to offer clarity that will allow shareholders to make an informed decision on CP's pending resolution.

Canadian Pacific argues that voting trusts have been used in hundreds of transactions involving regulated industries, including 144 transactions overseen by the STB since deregulation of the rail industry in 1980, further stating that trusts, besides protecting against unlawful control violations, are a key means of reducing the risk that the regulatory approval process will either interfere with the marketplace's assessment of a merger or be used as a tool by management to fend off would be acquirers.

As CP awaits for a reply from the STB, the railway is considering its legal options in response to recent actions by a number of major US railroads that have apparently stated publicly they are working collectively to block CP's efforts to pursue NS. To some CPs attitude demonstrates a dogged determination to rationalise the industry, to others a picture of a company desperate after failing to make a similar deal with CSX in 2014.