U.S. railroad operator Norfolk Southern said its board unanimously rejected Canadian Pacific Railway $28.4 billion acquisition proposal, saying the offer undervalued the company and could face regulatory hurdles.
Canadian Pacific has argued that the combined railroad would offer unparalleled customer service and competitive rates for shippers, and that it would satisfy the U.S. Surface Transportation Board (STB) and Canadian regulators.
Norfolk's shares were down 5 percent at $88.50 in premarket trading on Friday.
Norfolk also said it was targeting about $2.1 billion in capital expenditures next year.
"There is a high probability that, after years of disruption and expense, the proposed combination would be rejected by the Surface Transportation Board," Norfolk Chief Executive James Squires said in a statement on Friday.
The STB has a public interest test when considering whether to approve mergers. A deal would not only have to address antitrust concerns but also result in improved service, economic efficiencies and public safety for those using the railways.
Norfolk said a combination of the companies would likely increase congestion issues in Chicago, a junction where East- and west-based North American railways meet and hand off cargo, as Canadian Pacific does not have efficient Chicago bypass routes.
Canadian Pacific has said that a merger would reduce railroad traffic congestion in Chicago and help the combined company to save at least $1.8 billion annually.
Regulators have been skeptical of North American railway mergers for years. Canadian National Railway Co's bid to buy Warren Buffett-owned Burlington Northern Santa Fe was blocked by U.S. antitrust authorities in 1999-2000.
Canadian Pacific's merger talks with CSX Corp, which owns a large network across the eastern United States, also failed last year.
"Even in the unlikely event of approval, Norfolk Southern would be in limbo for this extended period, causing loss of momentum and disruption to our business and operations," Squires said in a letter to Canadian Pacific's Chief Executive Hunter Harrison on Friday.
Norfolk said operating synergies between the two companies would be limited as Canadian Pacific and Norfolk Southern networks serve entirely separate regions and only connect at five points.
Norfolk Southern operates 20,000 route miles in 22 states, mostly in Eastern United States, while Canadian Pacific transports to eight major ports in the United States and Canada, including Vancouver and Montreal.