UPDATE 1-U.S. military: CP, Norfolk Southern merger could affect defense

(Adds details from letter, background, context, comment from
CP)
By Nick Carey
CHICAGO, April 7 (Reuters) - The U.S. military on Thursday
raised concerns with a federal rail regulator over the voting
trust Canadian Pacific CP.TO has proposed as part of its
takeover bid for Norfolk Southern (NYSE:NSC) NSC.N and said the deal
could adversely affect the country's national defense.
In a letter to the U.S. Surface Transportation Board (STB)
dated April 7, the Department of Defense said CP's proposal to
have its chief executive, Hunter Harrison, run Norfolk Southern
as part of the voting trust "could prove to be untenable due to
the appearance of common control" of the two railroads.
CP, which is Canada's second-largest railroad, disclosed a
$28 billion offer for Norfolk Southern in mid-November. The
Calgary-based company has said a merger would result in savings
of more than $1.8 billion annually. ID:L3N13C593
Norfolk Southern has rebuffed all advances from CP.
The letter comes as a response to a March 2 petition from CP
to the STB seeking a "declaratory order" on its voting trust
proposal. The idea would be to place both railroads in a trust -
if they agreed to merge - pending a review by the STB. Under the
STB's merger rules, common control is not allowed.
The Department of Defense said putting Harrison, a
septuagenarian railroading legend, at the helm of Norfolk
Southern while a review was underway would put him in a position
in which he "must make business decisions with potentially
competing interests."
The Department said in the letter that "it is too early to
determine" whether a merger would degrade national defense, but
said "the potential certainly exists."
Under the rules for a voting trust for a major railroad
merger, there may be no collusion, joint decision-making or any
other form of common control prior to regulatory approval. The
two must continue to operate as separate entities until a merger
gets the green light.
A spokesman for CP said the railroad looks forward to
"providing a fulsome response" at the proper time to the
department's comments.
The U.S. military relies on rail networks to move
defense-related cargo across the country, both during peace and
times of war.
A number of major rail customers have recommended against
any merger, citing concerns that CP's plans to cut costs at
Norfolk Southern would gut the railroad and harm service. They
include package delivery company United Parcel Service Inc (NYSE:UPS)
UPS.N , the single biggest customer of the major U.S.
railroads.
Some U.S. politicians have also spoken out against a merger.
Earlier this week, the chairman of the U.S. House Transportation
and Infrastructure Committee said he did not believe a merger
was in the interests of the U.S. freight transportation system.
ID:L2N1780OT