CP pleads its case to U.S Department of Justice over opposition to proposed NS acquisition

The latest chapter of Canadian Pacific’s unsolicited efforts to acquire Norfolk Southern was rolled out earlier this week, with CP writing a letter to the United States Department of Justice (DOJ) in which it asked DOJ to review recent actions by various U.S. railroads that publicly said they are collaborating to block “significant mergers in the railroad industry.”

A major driver for CP’s action stemmed from comments made by Union Pacific CEO Lance Fritz in a Reuters report in which he said that railroad mergers are not in the best interests of the industry, adding that UP is working behind the scenes to make sure industry M&A does not occur, as well as talking to other railroads about the potential impact of a merger.

CP’s letter to the DOJ explained that a large number of U.S. railroads appear to have begun a concerted effort to block CP’s proposed acquisition through a widespread campaign of meetings and solicitations with customers, the media, and other interested parties.

“The fact that these major railroads have joined to work so feverishly against CP’s proposal speaks volumes about their concerns regarding the impact the transaction would have on their competitive position,” CP wrote. “In fact, one CEO was quoted as saying that the merger ‘could actually be destructive of [their] shareholder value,’ and another CEO publicly opined that a CP/Norfolk Southern merger ‘would make it hard for . . . CSX to survive alone.’  Whether or not that latter statement is accurate, it really illustrates the level of enhanced competition these other railroads fear from a CP/Norfolk Southern merger.  They are—with good reason—concerned that the proposed Norfolk Southern acquisition will lead to a more competitive industry:  with the combined efficiencies, cost-savings, and the upgraded competitive advantages, the combined companies will be much better positioned to price competitively, improve service quality, and create the type of competitive environment that CP’s competitors are afraid of.  But fear of competition does not justify the collective action of competitors.  As the Department of Justice has said on many occasions, the antitrust laws are designed to protect consumers against unfair actions in restraint of trade, not to protect companies against price and other competition from their competitors.”

CP added that the collective communication strategy of its competitor railroads is also likely illegal because it is anticompetitive, noting it is an agreement to collectively work together to prohibit the introduction of competition by a new competitor, which it said is akin to a group boycott in principle and intended effect.  

In the aforementioned Reuters report, UP’s Fritz, who was speaking at the Midwest Association of Rail Shippers meeting in Lombard, Ill., made his case against railroad M&A clear on a few different levels, with UP speaking with state and federal legislators, customers, and regulators (the Surface Transportation Board).

The top UP executive said that a merger would create problems in the Chicago interchange, which is by far the busiest interchange of railroad activity in the U.S., adding that various mergers in the 1990s resulted in major service-related issues. And he also noted that an industry merger would “increase the pressure enormously” on other railroads to consolidate, too.

A railroad executive told LM that Fritz’s comments aligned with UP’s longtime position that railroad mergers were not worth the political risk, coupled with how it believes there is plenty of opportunity to improve its own system without M&A.

And he added that it CP-NS should not be viewed as a merger of necessity, with some of the main issues in the industry, like significant energy-related declines and a manufacturing slowdown, not able to be efficiently solved or addressed by mergers.

The freight railroad sector has shrunk from 56 Class I railroads in 1975 to seven in 2005. And with such few players it makes the current situation regarding Canadian Pacific’s unsolicited nearly $30 billion offer to acquire Norfolk Southern interesting in that aside from CP, obviously, there does not appear to be a ton of public support for the proposed deal.

One example of that was found in a recent shipper survey by investment firm Cowen & Company, which found that 71 percent of surveyed shippers were not in favor of a CP-NS merger.

And with the current balance of power in North America among the Class I railroads––two in the east, 2 in the west, one in the middle, and 2 in Canada––industry experts say it has created a very stable playing field, but were one of the legs of this “table” to be pulled, it would require some sort of response among the other members of the supporting cast, which he said is not likely in their best interests.