Canadian Pacific Railway Ltd. has sent an offer letter to Norfolk Southern Corp. that proposes a business combination of the two companies, according to a press release issued by Canadian Pacific.
The merger of the two companies would reshape the North American rail industry.
Canadian Pacific said in the press release that the combination of the two companies would create a transcontinental railroad that has a scale and reach to deliver improved levels of service to customers and communities.
The merger would also enhance competition and create significant value to shareholders.
Canadian Pacific adds in the press release that the combined company would provide a new approach to terminal access.
If the new company failed to provide adequate service or competitive rates, another carrier will be allowed to the combined companies' tracks and into its terminal to deliver an unprecedented alternative to the affected shipper.
Canadian Pacific adds in the press release that the combined company would also give shippers the choice to connect with another railroad anywhere along its network.
This move will bring an end to the practice of "bottleneck pricing" to a large number of shippers in the U.S.
Bloomberg adds that a tie-up would bring together Canada's second largest railroad with eastern U.S.'s number two carrier.
The merger would also alter the balance of power in North American railroading.
Bloomberg adds that since the U.S. deregulation in 1980, mergers have shrunk the industry to four major U.S. carriers plus Kansas City Southern and two large Canadian operators, Canadian Pacific and Canadian National Railway Co.
Kansas City Southern operate in the middle of the U.S. and into Mexico.
Logan Purk, an analyst for Edward Jones & Co., told Bloomberg that he wouldn't be surprised, though, if Norfolk Southern refuses the bid.
"This is the first letter to management that CP is sending," he said. "It wouldn't surprise me if Norfolk refused it out of the gate. That's when you can go to shareholders."
Norfolk Southern confirmed the receipt of the offer letter in a company issued press release and said that they will carefully evaluate and consider the proposal with the help of their financial and legal advisors.
The company said that Canadian Pacific has offered the company $46.72 in cash and a fixed exchange ratio of 0.348 Canadian Pacific shares per Norfolk Southern shares.
Norfolk Southern adds in the press release that the offer represents a less than 10 percent premium based on the company's closing price on Tuesday, November 17, 2015.
