CP Sweetens Purchase Offer for Rival Norfolk Southern
David B/FlickrThis story appears in the Dec. 21 & 28 print edition of Transport Topics.
Canadian Pacific Railway Ltd.’s battle to acquire Norfolk Southern Corp., which was sweetened by at least 10% on Dec. 16, definitely will extend into 2016 as the potential buyer pledged a proxy fight would start by February unless there was a peaceable agreement beforehand.
The Canadian carrier, which is pressing its plan despite Norfolk Southern’s prior rejections, added an option called a contingent value right, or CVR, worth as much as $3.4 billion from the current $27.4 billion, with additional value tied to the future share price of stock in a combined CP-NS business. After rejecting two previous proposals. Norfolk on Dec. 16 said its board “will carefully consider” the latest overture, while also noting that the latest CP plan did not address the “substantial regulatory risks and uncertainties inherent in the proposed combination.”
Combining the two companies would create North America’s third-largest railroad, a $17.6 billion carrier with 44,000 workers and $3.82 billion in intermodal revenue, mostly from the current NS. Only BNSF Railway and Union Pacific Railroad, each with about $23 billion in annual revenue, would be larger.
“If this is going to be a street fight, so be it,” said Canadian Pacific CEO Hunter Harrison.
“How the situation plays out from here is unclear,” said Allison Landry, an analyst at Credit Suisse. “We see three potential avenues: 1) NS investors pressure the board on its own to agree to the merger; 2) another activist gets involved to facilitate the process; or 3) CP will initiate the proxy contest on its own.”
The Canadian Pacific offer was the third in a month. In addition to the new contingent value right, the latest offer includes $32.86 in cash and 0.451 Canadian Pacific share for each NS security.
CP board member William Ackman, who led a successful proxy fight to oust that rail’s former management, said that by Feb. 14, CP would either seek NS shareholder approval of a resolution directing NS to negotiate over a deal or put up a slate of new, merger-friendly directors to replace current board members.
“We don’t want to go the route of throwing out the board of directors,” said Ackman. “We want to get something signed up as a Christmas present.”
Norfolk contends its own plan to improve its operating ratio by 5 percentage points to 65 within four years is a better option for shareholders, given its expectations that CP’s approach won’t be approved by the Surface Transportation Board.
As a proxy fight or more friendly interaction play out in the financial arena, CP on the regulatory front needs to convince STB to allow the placing of Canadian Pacific stock in a voting trust while the combination of the companies, which would be the first rail merger in nearly two decades, is considered.
If a voting trust structure is adopted, as CP contends it will be in May, Harrison would relinquish all connections with CP and move to take over as CEO of Norfolk. At the same time, CP would issue the contingent value right.
The CVR, which CP officials compared to an insurance policy, would provide an added payment that decreases as the value of shares in a new corporation composed of 53% CP and 47% NS shares increases. For example, if the CP-NS shares are $125 when the CVR is issued, the right would be worth $9.53, but if the stock was at $175, it would be worth $4.76.
NS characterized CP’s earlier offers as “grossly undervalued.” NS stock over the past year has traded between $72 and $112 per share. It was under $80 in mid-November and has risen above $90 since rumors of CP’s interest circulated.
Norfolk Southern, citing comments from former STB commissioners, insists that CP’s voting trust won’t be approved. NS supporters say the CP approach isn’t really a voting trust, which is supposed to ensure that CP and NS operate separately, and that STB wouldn’t “be fooled into thinking that CP and NS were operating independently.”
CP maintained that STB has approved 144 voting trusts over two decades, while none has been rejected.
Ackman attacked NS, saying the company’s management has misrepresented the transaction’s value. He maintained the combined CP-NS stock could be worth as much as $237 when STB approves the combination.
