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Canadian Pacific Railway locomotives move cars at a railyard in Calgary, in a May 16, 2012 photo.Jeff McIntosh/The Canadian Press

The merger that would form North America's largest railway was crafted in the boardrooms of Calgary, home to Canadian Pacific Railway Ltd. But the impetus for the takeover bid for Norfolk Southern Corp. springs from the congested rail yards of Chicago, a freight bottleneck where six major railways swap strings of railcars.

The hub, which has been the target of complaints from railway executives and shippers for years, has come under new strain as trains have got longer and freight volumes have risen.

CP says its $28-billion (U.S.) proposed takeover of Virginia-based Norfolk Southern unveiled on Tuesday would allow it to pass through the choke point in the Chicago yards and elsewhere and hand off trains at other points along the railway. This would ease congestion for it and other railways while ensuring that customers get their goods on time, it says.

Norfolk Southern has offered a tepid response to the unsolicited cash and shares offer of $46.72 and 0.348 in stock, describing it as "highly conditional" with a low premium. "Notably, any consolidation among Class I railroads in North America would face significant regulatory hurdles," the company said.

But CP hopes the prospect of a more fluid rail system and a promise of competitor access to its terminals will alleviate concerns of shippers and the U.S. Surface Transportation Board, which will have the final say on the proposed merger.

A takeover of Norfolk Southern would create a company with 55,000 kilometres of track and port access on three coasts, including New York and Vancouver. The deal would help shift CP's focus from commodities such as potash and grain to more container and automotive freight – goods that carry shipping premiums while requiring more attention to service. Norfolk Southern's network would also link the oil sands with the refineries in the Eastern United States.

But most analysts say the deal will never get regulatory approval. And even if it did, the STB would impose regulations that will be costly for all railways.

"The potential inking of a merger agreement between [Norfolk Southern] and CP is by no means a foregone conclusion, given [Norfolk Southern]'s apparent reluctance as well as the need to gain regulatory approval," said Robert Salmon, a Deutsche Bank analyst. "If a deal is announced, we would expect the Surface Transportation Board to closely review the potentially large railroad merger."

Walter Spracklin, a Royal Bank of Canada equities analyst, said a merger makes operational and financial sense, but CP would have to prove to the regulator that the combined companies would offer shippers better rates.

A review of the takeover would be the first test of tougher rules the STB implemented after blocking the merger of Canadian National Railway Co. and Burlington Northern Santa Fe in 2000. The regulator requires that any merger enhance competition – not merely preserve it – to ensure that shippers retain a choice of railways and competitive freight rates. The new rules came after a string of rail mergers in the previous decades reduced the number of major railways to today's seven, including the Canadian companies, from 33 in 1980. The resulting railway map in the United States is roughly split north-south by the Mississippi River. BNSF and Union Pacific operate in the west while CSX Corp. and Norfolk Southern operate in the east.

CN's U.S. lines run down the middle of the country to the Gulf of Mexico. CP's, meanwhile, cover parts of the U.S. Midwest and end at Chicago, where it and the others run into the congested yards that handle a quarter of the rail traffic in the United States.