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CP bids for Norfolk Southern

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World Coal,

Canadian Pacific (CP) has made an offer for US rival, Norfolk Southern, in a deal that values the US company at US$28.4 billion.

“We believe that combining our two great organizations will allow us to form an integrated transcontinental railroad with the scale and reach to deliver unsurpassed levels of safety and service to our customers and communities, while also increasing competition and creating significant shareholder value,” said CP Chairman, Andrew Reardon, and CEO, Hunter Harrison, in a letter to Norfolk Southern’s CEO, James Squires.

The proposed deal would be a 50% cash and 50% stock transaction with Norfolk Southern shareholders receiving US$46.72 per share in case and 0.348 shares of stock in a combined company.

Norfolk Southern appeared lukewarm to the suggested deal, however, describing the big as “low premium, non-binding and high conditional” in a press release. It also noted that any deal would face resistance from industry regulators, a threat CP has attempted to preempt by offering to allow other carriers to use the combined company’s network in the event that it failed to provide adequate service or competitive rates.

CP also said it had “worked extensively with our lead transaction counsel Simpson Thacher and our US and Canadian regulatory counsel of Stinson Leonard Street and Bennett Jones, respectively, to confirm not only the feasibility of the proposed transaction but also out plan to ensure a smooth and expeditious review and approval process.”

Both CP and Norfolk Southern are so-called Class 1 railways according to the US Surface Transportation Board, which would only approve the deal if it felt it was in the public interest. The last merger between Class 1 railroads came in 1999 and the current industry structure – with CSX and Norfolk Southern operating in the eastern US, BNSF and Union Pacific in the western US, CP and Canadian National in Canada and Kansas City Southern operating north to south – is viewed as highly consolidated.

According to the Canadian company, it has already received a commitment from J.P. Morgan Securities to provide US$14.2 billion to finance the deal. For its part, Norfolk Southern said that its board of directors would “carefully evaluate and consider this indication of interest”, adding that its shareholders did not need to take any action at this time.

Norfolk Southern operates about 20 000 miles of railroad in 22 US states and the District of Colombia. It is CP’s second target to takeover in 13 months after an approach for CSX was rejected last October.

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