CP voting trust plan draws U.S. objection
Department of Justice weighs in on Norfolk Southern Corp. governance
Canadian Pacific Railway Ltd.’s plan to set up a voting trust to allow its chief executive to run Norfolk Southern Corp. in advance of its proposed takeover of the U.S. carrier should be rejected, the U.S. Justice Department said.
The trust structure is meant to allow Norfolk Southern investors to be paid for their shares while the U.S. railway keeps operating on its own pending a regulatory review of Canadian Pacific’s unsolicited bid. The Justice Department, in a written statement Friday, said the trust would fail to keep the railways separate during the review and would risk harm to current and future competition.
“Canadian Pacific’s voting trust proposal would compromise Norfolk Southern’s independence and effectively combine the two railroads prior to completion of the STB’s review,” Bill Baer, the head of the department’s antitrust division, said, referring to the U.S. Surface Transportation Board. “That makes no sense.”
Canadian Pacific, Canada’s second-largest railway, is seeking the STB’s approval of the trust structure. The U.S. army on Thursday voiced opposition to the deal and the trust, saying it could harm national defence for two companies with “potentially competing interests” to be managed as one.
“Surely that can’t help CP’s chances,” Steven Paget, an analyst at FirstEnergy Capital in Calgary, said in a telephone interview. “This is the STB’s call, but the Department of Justice has a role in mergers.”
Billionaire investor Bill Ackman, whose Pershing Square Capital Management is the second-largest shareholder of Canadian Pacific, with a 9.1 per cent stake, has advocated for the merger during conference calls with analysts and investors.
Canadian Pacific CEO Hunter Harrison has repeatedly said Norfolk Southern could be run during the regulatory review by an executive of his company — even suggesting himself as a possibility — so that merger integration is swift and seamless once regulators sign off.
Harrison has noted that a similar arrangement was put in place at Illinois Central Corp. before Canadian National Railway Co., the country’s largest carrier, acquired it in 1998. Harrison was running Illinois Central at the time and later went on to run Canadian National.
“While CP is disappointed in the position taken by the DOJ, voting trusts have been used in hundreds of transactions involving regulated industries,” Marty Cej, a spokesman for Canadian Pacific, said by email.
Voting trusts “have long been recognized by the STB, regulators and the courts as an effective means of insulating the carriers from unlawful common control during regulatory review,” Cej said. “We strongly believe Mr. Harrison would be completely independent and clear from any influence at CP if he were to assume the role of CEO at NS.”
Norfolk Southern has rejected several approaches from Canadian Pacific, including one in December that valued the U.S. carrier at US$27 billion, saying the merger and the proposed voting trust wouldn’t be approved by regulators.
While the Norfolk, Va.-based carrier has been trailing major rivals as measured by operating ratio, which compares expenses as a percentage of sales, it’s not sitting idle.
Jim Squires, who became Norfolk’s CEO in June, announced a cost-cutting and efficiency plan following Canadian Pacific’s merger offer that would save US$650 million and trim 2,000 employees by 2020.
“Everybody knows Norfolk Southern is a lagging railroad,” Paget at FirstEnergy said. “A little dose of Hunter could really make them come alive.”