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Norfolk Southern is known as a ‘railroader’s railroad’ with a strong southern culture that is unlikely to welcome a takeover.Luke Sharrett/Bloomberg

Canadian Pacific Railway Ltd. has made an offer to join forces with Virginia-based Norfolk Southern Corp. in a bid to form the largest railway in North America.

The Calgary-based company took the unusual step of confirming the rumoured takeover talks in a press release that did not mention how much CP is willing to pay. CP sent Norfolk Southern a letter on Tuesday offering an undisclosed amount of stock and cash. "The ball is in their court," CP spokesman Martin Cej said.

Norfolk late Tuesday said it received an "unsolicited, low-premium, non-binding, highly conditional indication of interest" from CP to acquire the company for cash and shares valued at $94.94 (U.S.) per Norfolk share, or a total of about $28-billion (U.S.). That is less than a 10-per-cent premium over Norfolk's closing price Tuesday, it noted. Norfolk said it will "carefully evaluate and consider this indication of interest."

Buying Norfolk Southern would fulfill CP chief executive officer Hunter Harrison's dream of forming a railway with 53,000 kilometres of track and access to three coasts, including coveted ports in New York, New Jersey, Vancouver and the Gulf of Mexico. But the deal faces several hurdles.

Norfolk Southern is a much bigger company than CP, and has a reputation as a proud company with a strong corporate culture.

And any deal must win the approval of regulators in Canada and particularly the United States, which has a history of blocking big railway mergers.

In an attempt to fend off antitrust objections from shippers and regulators, Mr. Cej said the combined company would allow customers more freedom in choosing routes and offer greater access to rivals' networks with expanded access to interchange points. "CP strongly believes that the combined railroad would offer unparalleled customer service and competitive rates that will support the success of the shippers and industries it serves, and satisfy the U.S. Surface Transportation Board and Canadian regulators," CP said.

"The proposal, which includes a sizable premium in cash and stock offered to Norfolk Southern shareholders, would result in a company with the potential for faster earnings growth than either CP or NS could achieve on their own, all the while maintaining a strong investment grade credit rating," CP said in a press release after the close of markets on Tuesday.

Norfolk Southern, which has a market value of $26-billion (U.S.) and 29,000 employees, operates in the eastern half of the United States.

CP, with a market value of $28-billion (Canadian) and 13,000 employees, has lines that run from the B.C. coast to Montreal, and south into parts of the U.S. Midwest.

Norfolk Southern did not immediately respond to an interview request.

The offer comes a little more than a year after CP tried and failed to merge with Norfolk Southern's eastern rival, CSX Corp. of Florida. Executives at CSX and other railways said they doubted the U.S. regulator, the Surface Transportation Board (STB), had any appetite for mergers, given the service and pricing complaints from miners, manufacturers and grain shippers that rely on North America's seven railways to reach markets.

Speaking on a conference call with analysts in April, Norfolk Southern president and now CEO James Squires said he didn't think rail mergers were a "good idea."

He said the regulatory approval process can be long and costly, and there are few efficiencies to be gained in an end-to-end railway combination. He did, however, not entirely rule them out.

"We're obviously here to serve our shareholders, so there are no categorical answers in that regard," he said. "On the other hand, we do see significant challenges associated with further consolidation."

CP said a merged company would be able to skirt the heavily congested hub of Chicago, where the major railways hand over cars.

CP would also gain direct rail access to the cluster of oil refineries in the eastern United States.

"An efficient end-to-end freight shipment solution will also improve safety, reduce highway congestion, and allow the rail industry to play an even greater role in the revival and sustained recovery of the North American economy," said CP, adding it hopes Norfolk Southern gives the offer "due consideration."

CP chief operating officer Keith Creel, speaking at a transportation conference in Toronto earlier on Tuesday, said rising freight volumes, a growing economy and customer demands for better rail service through streamlined networks will drive mergers and help persuade the STB that bigger railways are good for everybody.

"When it comes to consolidation, it's not if, it's when," said Mr. Creel, 47. "So regardless what the naysayers say, there's only so many railroads. You are not going to build new railroads. The economy is dependent upon the railways. Population is going to grow in the States. Population is going to grow in Canada.

"There is a need to move more stuff as the world evolves. The highway systems between the two countries can't sustain it. It's got to go somewhere. It's going to go on the railroad."

Mr. Creel said support from customers and the takeover target is needed before any hypothetical deal could be approved by the STB, which in 2000 blocked a merger between Burlington Northern Santa Fe and Canadian National Railway Co. The regulator responded to complaints from shippers about deteriorating service and higher freight rates by imposing new conditions on any merger, requiring that the rail companies demonstrate a deal would enhance – not merely preserve – competition.

"I think that if you were to get two railroads to agree, they had that same voice, that gives you the argument to go to the STB and say, 'Listen, this is pro-service, this is pro-competitive,'" Mr. Creel said.

"You've got customers onside. You got some that are begging for service improvements. You've got some that are begging for competitive options. You've got some that are begging for more reach into particular networks for additional revenue streams.

"That's what it takes in my mind to get the deal done. Is it a lot of work? Is it going to be easy? No, it's not going to be easy. Nothing in life is easy."