CP renews call for Norfolk Southern merger in white paper

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Canadian Pacific Railway Ltd. has renewed its call for a merger with Norfolk Southern Corp. on Tuesday, this time in a nine-page white paper.

The Calgary-based freight carrier said the $28-billion (U.S.) takeover of Virginia-based Norfolk Southern is needed to meet the current and future demands of North American economic growth, while easing rail congestion without the need to add track or terminals amid increasing government oversight.

"Canadian Pacific believes that industry consolidation offers the best opportunity to improve efficiency of the existing network and creates much needed incremental capacity without adding infrastructure, all while improving service for shippers," the paper said.

Norfolk Southern has rejected three bids from CP, saying the merger would be unlikely to receive regulatory approval, and would worsen congestion around the key hub of Chicago. The company has also called the offer too low, and warned CP's "cut to the bone" method of boosting efficiency would be bad for the company and its customers.

Norfolk Southern has allies in this view. The U.S. Surface Transportation Board has posted on its website about 10 letters opposing the proposed merger from industry groups served by Norfolk Southern, and several from U.S. lawmakers.

"Should CP's uninvited merger plans come to fruition, we believe that coal service disruptions would be inevitable as physical plant and other assets are 'rationalized' by CP out of West Virginia and its coalfields," the West Virginia Coal Association said in a letter last week to the U.S. regulator.

Several expressed fears the merger would spur the final round of consolidation in the North American rail industry, leaving shippers to deal with just two geographically separate rail carriers.

CP, however, says the end-to-end merger of the two rail companies would enhance service by reducing train handovers and offering the chance to share infrastructure.

"The CP proposal will enhance competition, not diminish it, which is good for customers and competitors alike," CP said.

Government regulations on speed and limited abilities to expand existing yards and tracks mean adding capacity has become difficult, CP said in the paper. The company has reduced the time rail cars are idle, but "while we continually strive to be more efficient, the law of diminishing returns applies and we need to find other ways to address capacity issues," CP said.

CP has appealed to Norfolk Southern shareholders to urge the company's leaders to sit down and talk about a merger. CP's leaders have predicted the merger fight could come to a proxy battle at Norfolk Southern's upcoming annual meeting.