CP willing to take NS offer directly to shareholders

Canadian Pacific shareholder and activist investor Bill Ackman of Pershing Square Capital Management said the rival railway’s resistance to CP’s takeover bid is “reasonably likely” to result in a proxy battle.    Canadian Pacific Railway appears willing to engage in a proxy battle if Norfolk Southern Corp. continues to resist its takeover bid for the number four railroad in the United States.
   Norfolk, Va.-based NS rejected a second offer from CP earlier this week after a previous unsuccessful bid in November that NS referred to as “grossly inadequate,” and highly unlikely to receive regulatory approval.
   The revised offer, worth an estimated $30 billion, included $32.86 in cash and 0.451 shares in a new holding company that would own both Class I railways.
   During a conference call with analysts, CP shareholder and activist investor Bill Ackman of Pershing Square Capital Management said the company is willing to take the revised offer directly NS investors and shareholders. He and Canadian Pacific CEO Hunter Harrison said they have both received communications from activists interested in engaging in a proxy battle with Norfolk Southern.
   Ackman, who is one of the world’s most powerful investors, controlling $14.8 billion in assets, said investors are frustrated with NS’s poor stock performance, making “reasonably likely” activists would seek to replace its board of directors. Ackman initiated a similar proxy fight with CP’s board to install Harrison, widely credited with the turnaround of CP, back in 2012.
   On the call, Ackman compared the objections of NS’s board to the takeover to those that CP’s management raised during that proxy battle. He and other CP executives didn’t pull any punches, essentially accursing NS CEO James Squires of mismanagement and letting his pride deter him from considering the merits of the offer.
   “Jim is not a proven railroad executive,” said Ackman. “In terms of getting a new operating ratio target, they have been stuck in the low 70’s for two decades…What happens in situation like this is that pride gets in the way. He’s fighting to keep his job.”
   “NSC does not understand the facts of the transformational journey CP undertook to perform the way it does or the way that we manage a railroad day-to day or week-to-week…we took one of the worst performing railroads to one of the best,” added Keith Creel, chief operating officer at CP.
   Squires on Monday outlined his reasoning for rejecting the “revised, reduced” offer (the original offer included a higher cash value, but lower stock equity in the merged company). He cited a white paper by two former Surface Transportation Board commissioners that indicated the merger was unlikely to win approval from U.S. regulators, but CP said it was prepared to close use a voting trust to complete the transaction to alleviate regulatory concerns.
   This still would not guarantee approval from the STB, however, and the approval process could take up to 18 months as it would require public hearings for comments. Investment analysts Cowen & Co. Monday released a survey saying 71 percent of rail customers oppose a merger between CP and NS, which would only make securing STB approval that much more difficult.
   “We see the most important takeaway from this multi-hour conference call is that Canadian Pacific management believes they can run Norfolk Southern better than existing management and drive significant value,” investment firm Stifel said of the proposed merger in a client note. “The overarching current plan is for CP to be placed into a voting trust and Hunter Harrison to become the CEO of NSC, with Keith Creel running the show at CP.
   “Our rating and estimates remain unchanged for both Canadian Pacific and Norfolk Southern given the unlikely nature of this proposed deal,” added Stifel.