Calgary Alberta - Canadian Pacific Railway (CP) has given up on its attempt to merge with Norfolk Southern Corporation (NS) days after the U.S. Justice and Defense departments raised concerns about the proposed takeover of the Virginia-based company.
 
Calgary-based CP initially proposed the deal in November, which would have created the largest railroad in North America.
 
It would have cost about US$30 billion and expanded CP's rail network, especially in the eastern U.S. and the Chicago area, where there's a major rail hub.
 
But CP said Monday it's no longer going to ask NS shareholders during their annual meeting on 12 May 2016 to vote in favour of merger negotiations.
 
"We have long recognized that consolidation is necessary for the North American rail industry to meet the demands of a growing economy, but with no clear path to a friendly merger at this time, we will turn all of our focus and energy to serving our customers and creating long-term value for CP shareholders," CP CEO Hunter Harrison said in a statement.
 
CP's move comes after the U.S. Justice Department expressed opposition to the company's proposal to set up a voting trust pending a regulatory review of the merger.
 
The department said the voting trust proposal would have compromised NS's independence and effectively combined the two railroads before the review by the U.S. Surface Transportation Board (STB) was complete.
 
The U.S. Defense Department also weighed in, saying a full review by the STB was required because the potential exists that a merger could "adversely affect national defence," according to a letter it wrote to the board dated last Thursday.
 
It pointed out that both rail companies serve major military bases that need rail service to perform their missions.
 
The department said it was also troubled that under the voting trust proposal, Harrison could become a senior executive at NS prior to the regulator ruling on the proposed merger, and therefore may be put in a position to make business decisions with potentially competing interests.
 
Analyst John Larkin of Stifel Nicolaus said CP will likely have to bank on the election of a supportive Republican president this fall to make another run at creating a transcontinental railroad.
 
But Larkin said securing U.S. military approval could be a bigger challenge.
 
"But Hunter is energetic and would like a transcontinental railroad, in which he believes so passionately, to be the crowning achievement of a stellar railroad career," Larkin said in an email.
 
NS had objected to the proposal on various grounds including an inadequate offer price and resistance from its customers and U.S. regulators.
 
In a news release Monday, the railway thanked shareholders and employees for their support as it works to improve its operations.
 
CP runs railways in Canada and parts of the U.S. Midwest and South, while NS of Norfolk, Virginia, operates railroads along the East Coast, Midwest, and South.
 
On the Toronto Stock Exchange, CP shares gained three percent at $180.62 in afternoon trading, while NS's shares were down two percent at US$79.83 on the New York Stock Exchange.
 
Ross Marowits.