Posts Tagged ‘Class 1 railroad mergers’

50 Years Ago Today Came Penn Central

February 1, 2018

A fading Penn Central herald atop a Pennsylvania Railroad keystone adorns a covered hopper car on the Wheeling & Lake Erie in Monroeville, Ohio. Some former PC rolling stock is still in active service.

It was 50 years ago today that the Pennsylvania Railroad and the New York Central System merged to form Penn Central Transportation Company.

We all know that the merger turned out badly. There were clashes between the cultures of the two one-time largest railroads in the nation, leading to the terms “red team” and “green team.”

Five decades later, some railfans are still fighting the red-green “civil war” even if in jest.

Both the Pennsy and the Central had been struggling financially for years and the result was an even larger railroad that continued to struggle.

Just over four years later, Penn Central sought bankruptcy protection. It was at the time the largest corporate failure in history but has since been eclipsed by the Enron bankruptcy of 2001. A little over eight years after it began, Penn Central the railroad was gone.

We also remember how the PC bankruptcy played a role in nudging Congress into creating the National Railroad Passenger Corporation, a.k.a. as Amtrak; had a role to play in the creation of the Consolidated Rail Corporation, a.k.a. as Conrail; and helped set up passage of the Staggers Act of 1980, which was a major step in transforming how railroads in the United States are regulated by the federal and state governments.

I’m oversimplifying things here because the creation of Amtrak, Conrail and deregulation were complex processes that can’t be traced in any one single event.

But Penn Central played an out-sized role in all of those because of the sheer magnitude of its failure.

Much has been written about the woes of Penn Central, including three books and countless articles.

As I pondered the legacy of PC, I was reminded of a conversation I had with a fellow Akron Railroad Club member at a train show a couple of years ago.

Noting that there is a Penn Central Historical Society, my fellow ARRC member wondered why anyone would be interested in celebrating a failed railroad.

In its day, Penn Central was known for bad tracks; frequent derailments, including trains that derailed while standing still; lost shipments; hostility toward passenger service and financial losses.

I don’t belong to the PC historical group, but I can explain why a “failed” railroad would have appeal to some.

Penn Central came about during a time when many people were coming of age and starting to learn about railroad operations in some detail.

Although the problems that Penn Central had have been magnified due to its bankruptcy, it was far from the only railroad in the late 1960s and early 1970s that was struggling. Indeed Conrail grew out of the ashes of several bankrupt railroads.

Arguably, Penn Central and all of it problems needed to happen for America’s railroads to make the transition from a highly regulated era to one of relative economic freedom.

Of course, that meant that dozens of flags had to fall and thousands of miles of track had to be pulled up. Thousands of people would lose their railroading careers.

The railroad network of the late 1960s was not economically sustainable. The manufacturing economy of the Midwest and Northeast was crumbling and railroads were suffering with it. There was too much railroad infrastructure for the business to be had.

This is not to say that the industry was without fault in bringing about its own struggles. But it’s a complex story involving a multitude of factors.

We can always speculate about how things might have been different had Penn Central been given the freedom from government regulation that Conrail enjoyed.

Some of the route rationalizations that Conrail was able to pull off had been objectives that Penn Central sought to achieve, but was thwarted by the regulatory structure at the time.

The political climate in which Penn Central was created was not conducive to implementing those grand plans.

As bad as Penn Central was, I find myself at times looking back at it with a certain nostalgic longing.

I would not want to see railroads operate today as Penn Central did, but time has a way of putting things into perspective. Penn Central was the last gasp of railroading as our parents’ and grandparents’ generations knew it when they came of age. My generation was able to taste only some of it.

Every generation has one or more things that it laments having lost from its youth whether it is steam locomotives, a favorite railroad or a rail line that you grew up with.

And so it was with Penn Central. It was once a major presence in my life and then like so many other things it was taken away. These losses tend to have greater effect on you during your young adult years. They also tend to stay with you in ways that later losses in life do not.

Some might say “good riddance” about the demise of Penn Central, but I find it a compelling story and one worth remembering and even celebrating.


CP Won’t Bar Harrison from Working for CSX

January 25, 2017

A regulatory filing made by Canadian Pacific with the U.S. Securities and Exchange Commission shows where E. Hunter Harrison can and cannot work under the terms of his non-compete agreement with CP.

E. Hunter Harrison

E. Hunter Harrison

Harrison, who recently stepped down as CP’s CEO, cannot work for Canadian National, BNSF or Union Pacific. But he could work for CSX, Norfolk Southern or Kansas City Southern.

CP granted Harrison a limited waiver of the non-compete clause, which also included waiving a provision that Harrison is not permitted to solicit for employment at another company any CP employees above the level of manager.

Specifically, CP’s waiver makes an exception for the railroad’s chief of staff.

News reports have said that Harrison is teaming up with activist investor Paul Hilal of the firm Mantle Ridge to oust CSX CEO Michael Ward.

Some believe that Harrison would use being the head of CSX to lead a merger effort. Last year Harrison and CP unsuccessfully sought to merge with NS.

If Harrison does make a bid to become part the CSX CEO, he will have until Feb. 10 to do so under the terms of the CSX bylaws for nominating members of the board of directors and filing resolutions to be heard during the annual meeting, which is usually held in May.

Harrison Continues to Preach Gospel of Mergers

April 21, 2016

He may have lost a round, but Canadian Pacific head E. Hunter Harrison continues to preach the gospel that railroad mergers are inevitable.

Speaking during a first quarter earnings call, the CP CEO said it’s a question of when – not if – there will be railroad mergers that result in transcontinental systems.

Canadian Pacific“This is not going away,” Harrison said, adding that shippers do not necessarily oppose mergers but are wary of them due to the poor execution of previous mergers.

He cited the breakup of Conrail by Norfolk Southern and CSX, and the merger of Union Pacific and Southern Pacific.

As Harrison sees it, his proposal to acquire NS fell victim to service failures that followed those consolidations.

And he didn’t like it. “I used to hate to get a spanking for something my sister did,” he said.

Harrison said mergers will be needed to handle rising traffic in future decades and to compete against trucks.

He said solving congestion problems in Chicago will continue to be a challenge for the railroad industry.

During the call, CP said it posted record financial results for the first quarter despite a 5-percent decline in traffic volume. The Calgary-based railroad also said that it would buy back some of its shares and increase its stock dividend.

Maybe Harrison Just Wanted the NS Top Job

April 12, 2016

I’m going to miss E. Hunter Harrison. He was always good for at least one posting a week and journalists love colorful guys who like to talk a lot to the media.

Now that Harrison and his financier Bill Ackman – the majority stockholder in Canadian Pacific – have folded their tent and retreated to Calgary after their failed campaign to acquire Norfolk Southern, things are going to return to normal, whatever that might be in a world in which rail traffic continues to decline.

Thousands of words are going to be written and spoken during the coming days and months about why CP failed to win over NS.

Most of those treatises will zero in on what Harrison did or didn’t do right in his efforts to merge CP and NS.

On TransportationAlready, Trains magazine columnist Fred Frailey has weighed in by saying that Harrison’s greatest mistake was to lose the political battle.

Frailey said that rather than emphasizing an operating plan Harrison should have formulated a political strategy to win over shippers and key political figures.

Once CP’s plan to merge with NS triggered intense political opposition the game was over.

That Harrison emphasized his operating plan – which he calls precision railroading – didn’t surprise me.

Precision railroading is his legacy, his claim to fame among a dozen other railroad CEOs. He’s written two books about it and the CP-NS merger dance gave him innumerable opportunities to talk about it.

I always thought that one of Harrison’s primary objectives all along was to take personal control of one of the big four U.S. Class I railroads so he could impose his philosophy of railroading on a larger stage.

It was one thing to do it at regional railroad Illinois Central or at two Canadian carriers.

Now, CP and Canadian National are just as big time as NS or CSX, but they are still Canadian carriers that happen to own a significant number of miles of track in the United States.

They don’t have quite the same networks or business mix as the big four of U.S. Class 1 carriers.

Harrison strikes me as being on a mission to show that his railroading philosophy not only works but is superior to the approaches used by other Class 1 carriers.

Although associated in the minds of many with Canadian railroads, Harrison is actually a Southern guy, having grown up in Memphis, Tennessee.

The IC was a well-run operation and Harrison has won a lot of respect in the railroad world.

One former CP manager who was part of the management team that Harrison and Ackman ousted after taking over CP said that Harrison “gets it” when it comes to running a railroad. The ex-CP executive had other complimentary things to say about Harrison even if he thinks Harrison gets a little too much credit for the so-called CP turnaround.

What he understood is that railroads make money moving freight cars, not allowing them to sit in railroad yards or sidings. Keeping freight moving was a cornerstone of Harrison’s precision railroading philosophy, even if it meant tacking a few low-priority boxcars onto the rear of a hot intermodal train.

Harrison is not going away. He’ll still be running CP, still be giving interviews and speeches, and still promoting his vision of how a railroad should be run.

I was surprised that Harrison and Ackman bailed out before the NS shareholder’s meeting next month.

But they might have been “encouraged” to do so by the opposition of the U.S. Department of Justice.

The Justice Department didn’t oppose merging the two companies per se. Rather it expressed concern about the voting trust arrangement that CP proposed which had Harrison and some of his associates going over to NS at the start of the merger review process by the Surface Transportation Board.

Perhaps the Justice Department opposition and/or some back channel communication from the STB convinced Harrison and Ackman that regulators were not likely to rule in their favor in the STB review of a hypothetical voting trust arrangement that CP asked them to examine.

The fact that Harrison couldn’t wait a year or two for the merger review process to play out showed how much he wanted to be CEO of NS now and suggests that for him personally it has always been about influence, control and legacy.

He didn’t really need for CP to buy NS to do what he wanted to do. Perhaps the proposed takeover was just his way to get into the NS executive suite.

Harrison might not have cared all that much if the STB rejected the merger because he would continue leading NS and running it his way.

We can expect Harrison to continue to beat the drums about the need for further consolidation in the North American Class 1 railroad industry but his words will receive less attention than they did when he was trying to take over NS.

That is not to say that further merger talks aren’t down the tracks. The climate today may not be right for a merger to create a transcontinental railroad, but it is not to say it that won’t change.

For now the Class 1s seem content to rule their own fiefdoms. Goodness knows they have plenty of challenges at hand, including dealing with declining coal and crude oil traffic. Bulk commodities aren’t what they used to be and railroads might have to start competing for less than carload or short-haul business that they long ago all but ceded to trucking companies.

Finding other business to replace coal is much on the minds of railroad CEOs these days.

However, sluggish business conditions have a way of encouraging mergers in corporate America. It may be that NS is amenable to a merger but would rather have danced with another partner.

CP Gives Up Trying to Acquire NS

April 11, 2016

Canadian Pacific gave up on Monday its struggle to acquire Norfolk Southern.

The Calgary-based railroad said it was withdrawing a resolution that was to have been voted on by NS shareholders that would have directed NS management to discuss a merger.

Canadian PacificThe NS board of directors had rejected three offers from CP to buy NS stock.

CP said in a news release that it would have “no further financial offers or overtures to meet with the NS board.”

That wording of the statement appears to leave open the possibility of trying again at a later time.

“We have long recognized 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,” said CP CEO E. Hunter Harrison.

CP has contended for several months that a merger with NS would create a North American transcontinental railroad that would enhance competition, ease freight congestion and improve service to shippers.

NS said in a statement that it remains committed to its five-year strategic plan to streamline operations, cut expenses and maintain superior customer service.

“The Norfolk Southern team has made significant progress and is on track to achieve annual productivity savings of more than $650 million and an operating ratio below 65 percent by 2020,” NS said. “We are confident the continued execution of our plan will deliver superior value to all of the company’s stakeholders by best positioning Norfolk Southern to succeed.”

The NS statement also thanked the company’s shareholders for their views and support. The company also lauded its employees for their hard work and dedication.

CP may have been motivated to give up its efforts to acquire NS after the antitrust division of the U.S. Department of Justice filed a statement with the U.S. Surface Transportation Board that described CP’s plans as being anti-competitive by compromising the independence of NS during the merger review process.

The Justice Department said that although Harrison and select CP executives would have cut their connections with CP, the latter would still exert a great deal of influence over NS and that would effectively combine the two carriers.

Saving Pennies to Bolster an Exective Image

April 10, 2016

Cancellation of the steam program, putting a posh executive resort up for sale and now not sending the executive train to the Masters golf tournament in Georgia.

None of those actions that have been undertaken by Norfolk Southern will do anything to improve the company’s bottom line, but they will have symbolic value in the months ahead as the NS board of directors continues to fight an unwanted takeover bid by Canadian Pacific.

Trains magazine reported last week that NS didn’t send its executive train to the golf tournament in Augusta, Georgia.

It remains to be seen, but chances are the executive train won’t be going to the Kentucky Derby either.

On TransportationIn both instances, NS has historically sent its executive train to both high-profile sporting events to entertain shippers, public officials and executives of other railroads.

Just as predictable as flowering trees in the spring, the NS executive train has departed Altoona, Pennsylvania, in the morning and passed through Northeast Ohio on the Fort Wayne Line about a week before the Derby, which is held on the first Saturday in May.

But when you are trying to cut costs, executive perks can become expendable. It is all about promoting an image.

“We do not have business cars at the Masters,” NS spokesman Rick Harris told Trains. “It was an internal business decision.”

CSX and BNSF do have their executive trains in Augusta, but they are not currently the target of a takeover bid by CP or someone else.

Norfolk Southern is not cutting expenses because it is unprofitable.

NS may be suffering from lost coal traffic, but it is not losing money. It is far from being Penn Central or Erie Lackawanna, two railroads that served the Eastern United States that lost a gondola load of money, seeking bankruptcy protection as a result.

No, the issue is a matter of how much money NS makes and whether it is doing enough to make more of it.

In that regard, the primary concern of NS executives is not just prevailing over CP as it is pleasing Wall Street analysts who can influence the buying and selling of NS stock.

That is not to say that the CP takeover bid in unrelated to what Wall Street analysts think.

When a company is unable to increase its financial performance with substantial new business, it often tries to make itself look good by cost cutting.

There is a saying that you can’t cut your way to growth, but you can make your financial statement look better in the short term, which is mostly what Wall Street cares about.

Hence, NS has announced a five-year strategic plan to achieve $650 million in annual savings and reduce its operating ratio to 65 percent or lower by 2020.

The plan also talks about finding new business. The strategic plan is filled with long-term goals and objectives, but it was created for short-term benefit.

Whether the five-year plan ever achieves its objectives is largely immaterial at this point. It shows that current management is doing something now to bolster the balance sheet.

In the short term, NS management is most concerned about the May 12 annual meeting at which interests representing CP will propose a resolution directing NS to discuss a merger with CP.

NS CEO James Squires will point to a laundry list of actions his company has undertaken to reduce costs as a way of arguing against the resolution and against the need to merge with another company.

Not operating the executive train to a golf tournament will save only a few pennies in the scheme of things, but keeping the executive horses in Altoona will be worth valuable debating points.

The last thing Squires needs is a dissident shareholder harping about how NS is spending money on “frills.”

Squires needs to create the impression that he and the current NS management are doing all they can to turn things around and that they know what they are doing.

It is all about building an image that instills confidence in the current management among stockholders.

That might be enough to persuade enough of them to vote down the CP-sponsored resolution.

Saving pennies is the sort of thing that you do when you are in a tough situation that has no easy or immediate solution. You play for time and hope to ride out the storm.

It must gall Squires and the NS directors that CP’s E. Hunter Harrison has all but called them incompetent by saying that if Harrison were the CEO of NS he could realize $1.2 billion in savings by implementing his precision railroading operating plan.

In time, NS will either chase Harrison away or succumb to him. In either case, it seems likely that the NS executive train will be back at the Masters in 2017.

If NS triumphs over CP, it will be able to return to a sense of normalcy, which means wooing shippers, politicians and other railroad executives by taking them for a train ride.

If Hunter gets what he wants, he, too, will need to reach out to the same constituencies.

And what’s spending a few pennies to do that? It won’t affect the bottom line but could go a long way toward helping build a badly-needed positive image.

DOJ Opposes CP Voting Trust Arrangement

April 9, 2016

A powerful opponent has lined up in opposition of Canadian Pacific’s plan to acquire Norfolk Southern.

The U.S. Department of Justice on Friday told the U.S. Surface Transportation Board that CP’s proposed voting trust would compromise the independence of NS before the STB could finish its review of the proposed merger.

STBCP has proposed placing itself into control of a voting trust during the merger review process.

CP CEO E. Hunter Harrison and select members of his CP management team would then take over the management of NS.

“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,” said Assistant Attorney General Bill Baer of the Justice Department’s Antitrust Division. “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.”

The Justice Department said the two railroads would have an economic incentives to align their business strategies before the merger has been reviewed and that those arrangements would be difficult to undo if the STB rules against the merger.

“The STB should reject the proposed voting trust structure because it risks altering the competitive landscape between the two railroads and indeed the entire rail system in a way that could not be reversed if the STB rejects the merger,” the Justice Department said in a filing with the STB.

“In reality . . . CP hopes to use Mr. Harrison as its proxy to implement the changes it desires at NS,” the Justice Department filing said.

Earlier this year, CP asked the STB to review whether a hypothetical trust structure would pass legal muster.

The STB has not said when it will rule on that request, but it has set an April 13 deadline for the submission of statements by interested parties.

Typically, a voting trust is put in place at the company to be acquired not at the company making the acquisition.

A CP spokesman expressed disappointment with the position of the Justice Department.

“Voting trusts have long been recognized by the STB, regulators and the courts as an effective means of insulating the carriers from unlawful common control during regulatory review,” said CP spokesman Martin Cej. “We strongly believe Mr. Harrison would be completely independent and clear from any influence at CP if he were to assume the role of CEO at NS.”

CP Issues White Paper Making the Case for ‘Precision Railroading’ at Norfolk Southern

April 9, 2016

Canadian Pacific has given Norfolk Southern stockholders a reading assignment in advance of the NS annual meeting on May 12.

In a white paper, CP seeks to make the case for how its “precision railroad philosophy” would improve NS operations by transforming it from an “industry laggard to leader.”

“Politicians, shippers and others are calling for a strong, healthy and high-performing rail system yet no one has the stomach to challenge the status quo,” said CP CEO E. Hunter Harrison in the paper. “Clearly, moving goods reliably and efficiently is top of mind for everyone in the industry; we believe precision railroading and a CP-NS combination address those challenges.”

Canadian PacificThe white paper, which was part of a series that CP has issued over the past few months to make the case for its proposed takeover of NS, said that precision railroading has enabled CP to reduce its operating ratio, improve service, reinvest record amounts of dollars in its network and create “significant shareholder value.”

A PDF version of CP’s latest white paper can be downloaded at

CP described precision railroading as a tried and tested approach that has already transformed two of the worst-performing Class I railroads into top performers.

The latter was a reference to CP and Canadian National, where Harrison was CEO for several year. Harrison also applied his precision railroading approach at the Illinois Central when he headed that railroad before moving to CN.

“Over the last 20-plus years, Mr. Harrison’s execution of precision railroading has transformed three Class I railroads into the best-run railroads in the world,” CP’s white paper said. “The likelihood is high that, under his leadership and guidance, NS can achieve similar success and perform far better than its management currently believes possible.”

The white paper noted that the previous management of CP had claimed during a 2012 proxy fight with Harrison and financier Bill Ackman of Pershing Square Capital Management that precision railroading would not work at CP.

“But precision railroading is a set of non-discriminating principles that can be effectively applied to any railroad in the world,” the white paper asserts. “Geographic, network, and business mix differences are irrelevant in the application of the underlying principles that guide day-to-day decisions.”

Harrison has stated that his operating philosophy has five foundations of improving customer service, controlling costs, optimizing asset utilization, operating safely, and valuing and developing employees. “These five foundations can be applied to any railroad with the same result,” the paper said.

The white paper said that after implementing precision railroading practices, CP was able to slash transit times, increase system velocity and reduce terminal dwell times.

By increasing efficiency, CP cut its locomotive fleet size by 40 percent and saw its operating ratio fall from 81 percent to 61 percent.

“The prevailing view in the rail industry is that more locomotives, more cars and more crews allow for the movement of more volume,” CP said. “Precision railroading challenges this view.

“Because track and yard capacity is finite, adding more equipment creates congestion and slows down the system. While it may sound counterintuitive, reducing fleet size actually enables a railroad to move more volume. By running fewer and heavier trains, faster and on schedule, assets can be utilized far more productively and can yield significant savings.”

As an example of how precision railroading has worked, CP said it has increased domestic intermodal traffic by 19 percent between 2012 and 2015.

CP claims it could achieve $1.2 billion annual savings at NS by shifting it to the precision railroading model.

Among other things, Harrison has suggested that NS would be able to mothball up to a third of its locomotive fleet.

NS CEO James Squires, though, has described precision railroading as a “short-term focused operating model” that would result in service deterioration, diversion of traffic to trucks, and a loss of service-sensitive customers.

Squires said that the CP approach would mean unacceptably deep reductions in capital spending and employment levels.

NS has begun to implement its own five-year strategic plan to gain $650 million in annual savings by 2020 by reducing expenditures, seeking new traffic and increasing profitability.

CP interests are sponsoring a resolution to be voted on by NS shareholders that would direct NS management to discuss a merger with CP.

The resolution is non-binding and the NS board of directions is opposing it. The NS board also has rejected three offers from CP to buy NS stock.

Trains magazine interviewed a former CP executive who said that Harrison deserved some, but not all of the credit for improvements since he took over after the 2012 proxy fight.

The executive, who Trains did not name, said that under CEO Fred Green, CP had begun making progress by cutting $80 million from equipment rental payments, saving $150 million for the pension plan, closed intermodal terminals, reduced fuel consumption and begun operating longer trains with the use of distributed motive power.

“We were a lot further along the curve than people realize,” the former executive said.

The executive, though, did give Harrison and his team credit for being more aggressive through such moves as shutting down humps in several yards.

“Hunter’s a good railroader. He gets it,” the former executive said. “He drives the assets.”

The former CP executive operational efficiency and cost-cutting were not the sole drivers of CP’s rebound.

“Fundamentally the franchise needed top-line growth,” the former executive said. “CP needed to flex its muscles in terms of pricing. It’s done that well.”

Even before Harrison had arrived, CP management has discussed whether it was being aggressive enough with above-inflation pricing.

After Harrison arrived, CP’s total revenue increased by 18 percent between 2012 and 2015 although its total carloadings fell by 1.5 percent.

During that same period, CN saw its total revenue rise by 27 percent and its traffic grow by 8 percent. Last year CN led North American Class 1 railroads with the lowest operating ratio at 58.2 percent.

Whether the success of CN and CP in using precision railroading would translate well at a U.S.-based Class 1 remains an open question.

Trains magazine quoted railroad analyst Anthony Hatch as saying that it is not possible to draw conclusions about the growth rates of CP and CN due to their different traffic mixes, particularly their bulk and carload business.

“But you can say that CN has done a terrific job leveraging the precision railroading legacy of EHH into the New Model Railroad — one that combines efficiency, productivity, and marketing to grow faster than the rails as a whole, transports as a whole, and the continental economy,” Hatch said.

A former NS executive, though, is not enthusiastic about precision railroading as it might apply to NS.

In an interview with Trains, former NS CEO Charles “Wick” Moorman called precision railroading a recipe for disaster.

“If Hunter puts out an order to park 700 locomotives, I don’t even give it a week,” Moorman said. “The service would collapse. It’s just that easy.”

Pa. Congressman Opposes CP-NS Merger

April 6, 2016

A Pennsylvanian congressman is among the latest in a long line of public officials to express opposition to a proposed takeover of Norfolk Southern by Canadian Pacific.

Bill Shuster, who is chair of the House Transportation and Infrastructure Committee, said he did not believe a CP-NS merger would be in the best interests of the U.S. freight transportation system, railroad employees, rail shippers and short-line railroads.

Shuster thus joins other members of the Pennsylvania congressional delegation and Gov. Tom Wolf in raising objections to the proposed merger.

NS is a major employer in Shuster’s district, which includes Altoona and the Juniata Locomotive Shop.

“A strong, healthy, and well-functioning freight rail system is critical to the movement of goods in this country,” Shuster said in a statement. “However, CP’s pursuit of a merger over the last two years has done nothing but create uncertainty in the rail industry, and there continues to be no clear path forward for such an arrangement . . . I believe it is time for all parties to move on from hypothetical merger proposals and focus on improving the transportation of goods and products to help grow the American economy.”

NS Offers Opening on CP Merger Talks

March 31, 2016

As expected, Canadian Pacific has filed with the U.S. Securities and Exchange Commission a shareholder resolution to be voted upon at the annual meeting of Norfolk Southern on May 12 that directs the NS board of directors to conduct “good faith discussions” about a merger.

The Calgary-based CP intends to send letters to NS shareholders to outline the value of the proposed merger.

Canadian PacificNS told the SEC in a proxy that it believes the CP-sponsored resolution is unnecessary because the NS board would be willing to discuss a merger with CP if the Canadian carrier obtains a declaratory order from the Surface Transportation Board and is willing to increase its offer.

CP has made three offers to acquire NS stock, but the NS board has rejected all three proposals.

The NS proxy filing signaling a willingness to discuss a merger was greeted warmly by CP.

“CP has consistently stated that we are open to discussing all terms of a potential deal, including price, but we can’t negotiate with ourselves,” said CP Chief Executive Officer E. Hunter Harrison in a news release. “Given we have also asked the Surface Transportation Board for a declaratory order on the voting trust model we were pleased to hear that Norfolk Southern may now be willing to engage in direct face-to-face discussions.”

In its statement of opposition, the NS board wrote that:

  • It is open to all feasible alternatives to drive shareholder value.
  • It has confidence in NS’ strategic plan, which aims to boost revenue and cut costs to reduce the railroad’s operating ratio to 65 percent by 2020.
  • It has clearly communicated its concerns regarding CP’s acquisition proposals.
  • CP has not addressed the board’s concerns regarding the value of its three merger offers or the regulatory risks of a merger.

It is unclear if the STB will issue before the NS annual meeting a ruling on the CP voting trust even though CP asked for one by May 6.

STB spokesman Dennis Watson said he couldn’t say when the board might rule.

Watson said the STB could issue a decision based on initial evidence or might begin a proceeding to ask the parties to submit additional evidence.

The latter would likely move a ruling by the board to date after the NS annual meeting.

“We have not heard anything from the STB on timing, and we are proceeding with our shareholder resolution,” said CP spokesman Martin Cej.

Although voting trusts are commonly used to insulate companies from unlawful control during a merger review process, CP has proposed an arrangement that the STB has never ruled upon.

CP proposed putting itself and not the company it wishes to acquire, into a trust. Harrison and other CP executives would sever their positions with CP and, presumably, take over as managers of NS.

Earlier, the STB set a deadline of April 8 for interested parties to file statements and participate in the declaratory order process.