Photograph by Bloomberg via Getty Images
By Stephen Gandel
December 23, 2015

Norfolk Southern (nsc) once again said ‘no thanks’ to rival Canadian Pacific (cp).

On Wednesday morning, the railroad company officially rejected a takeover offer from its rival, calling the latest offer “grossly inadequate.” Norfolk maintained that the big issue was that there was a high likelihood that regulators would reject a combination of the two railroads, and that the regulatory risk was too great to accept an offer. Norfolk said its analysis was based on consultations with two former commissioners of the Surface Transportation Board (STB), which would have to approve the combination.

On Dec. 16, Canadian Pacific upped its $30 billion cash-and-stock bid for Norfolk by offering to issue a “contingent value right” (CVR) to Norfolk shareholders. The CVR is supposed to compensate Norfolk shareholders if Canadian Pacific’s shares fall during the process of combining the two companies. Norfolk said the CVR would trade at a significant discount, and that it didn’t really represent a better offer for its shareholders. Norfolk rejected Canadian Pacific’s first offer last month.

A number of large deals have been stopped by regulators this year. On Monday, the Federal Trade Commission said it would block Staples bid to buy OfficeDepot. Canadian Pacific has said that it believes a deal with Norfolk would be ultimately approved. But Norfolk says that Canadian Pacific should request pre-approval for the deal from the STB, which the board has the right to give. Last month, Daniel Elliott, chairman of the STB, said that the review process for a Canadian Pacific-Norfolk deal would be lengthy and could take as long as 18 months.

Last week, a number of members of Congress, including U.S. Senator Dick Durbin of Illinois, wrote a letter to the STB saying that the board should carefully consider the potential negative impact of the deal on Chicago’s rail network. “We urge you to carefully review any plans submitted to the STB, and consider the potential negative impact of the proposal with respect to building a more efficient freight network in Chicago… and comprehensively examine the economic effects of such a consolidation on local industries and jobs in the Chicago region,” the statement said.

Norfolk’s stock has a market cap of $26 billion, and shares were up slightly on the rejection of the offer, perhaps suggesting that shareholders think Canadian Pacific could once again up its offer. Norfolk’s latest move leaves Canadian Pacific’s CEO Harrison Hunter with the option of abandoning the deal, or going to directly to Norfolk’s shareholders, possibly with a higher offer. Hedge fund manager Bill Ackman is the largest shareholder in Canadian Pacific. Ackman supports a deal with Norfolk, and has said that Norfolk’s CEO Jim Squires lacks the ability to turn around the railroad.

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