CP maintains pressure on Norfolk Southern to sell

A potential proxy fight is looming as the two companies trade counter arguments about whether Canadian Pacific’s latest offer to takeover the Norfolk, Va.-based Class I railway would win U.S. government approval.    The Canadian Pacific Railway’s attempt at a hostile takeover of Norfolk Southern Corp. continued Wednesday morning, with officials delivering a detailed presentation of key features of the proposed merger.
   NS last week rejected a revised second offer from the Calgary-based railroad, and CP responded this morning with a third bid. The latest offer would pay NS shareholders $32.86 per share plus give them a 45 percent ratio of shares in the combined company – the same terms as the second offer – plus 45 percent of a so-called “contingent value right,” essentially an extra benefit to shareholders if certain events occur that would have a maximum value of $25.
   Analysts have valued CP’s offer at about $30 billion, but NS officials claim the offer undervalues the company, would be unlikely to win regulatory approval from the Surface Transportation Board and would lead to diminished customer service.
   On Tuesday, CP dismissed a white paper authored by former STB members Chip Nottingham and Frank Mulvey on behalf of NS that argued the deal would not pass muster with the agency on several grounds, including having a voting trust to oversee the CP-NS merger.
   CP suggested that Nottingham and Mulvey were not qualified to weigh in because they never participated in a review of a “major” merger transaction while at the STB. The railroad said they were not consulted about details of its plan, which actually calls for CP to be placed in trust rather than the NS. It claims that the arrangement would not result in CP exerting premature control of NS prior to STB approval.
   “As such, their white paper is based largely on inaccurate assumptions, rumor, speculation and conclusions that are unsupported by fact or by law,” CP said in a statement.
   The railroad said it expected the STB to fairly and impartially evaluate the merger proposal.
   In its response, CP argued that use of a voting trust to protect the value of NS pending regulatory approval is lawful and in the public interest. It also rejected the notion that the deal is not in the public interest.
   “The CP+NS merger does not create a dominant carrier that would necessitate a reflexive merger in response. Rather, CP+NS would be better able to compete with the other large carriers. In this way, the merger adds competitive balance to the industry, making the industry more competitive as a whole,” the statement read. “It also improves capacity around Chicago, alleviating a key source of pressure on other carriers to merge.”
   The NS countered that the CP response to its analysis is “flatly wrong on the facts and the law,” noting that Nottingham and Mulvey did consider the voting trust structure.
   “No matter how CP executives are put in charge of NS management before the merger is approved, the STB likely would not be fooled into thinking that CP and NS are operating independently,” the number two eastern U.S. railroad said.
   In an interview on Bloomberg TV, Canadian Pacific CEO Hunter Harrison said that NS officials have been unwilling to negotiate so far, setting up a likely proxy fight for the company. He added he thinks the prospects of the deal going through are better than 50-50.
   Harrison also said he doesn’t expect BNSF Railway to make a competing bid for Norfolk Southern, despite Executive Chairman Matt Rose indicating otherwise in comments last week. Rose told Bloomberg in an interview, “If there is consolidation to be had, we would participate as well,” but this could simply be a ploy to increase regulatory interest in the potential merger.
   In evaluating any application for mergers or acquisitions in the railroad industry, the STB must take into account potential knock-on effects of the deal, including further consolidation. By telling regulators BNSF wouldn’t sit on the sidelines should there be a fresh round of consolidation, Rose may have hurt CP’s chances of getting an NS takeover bid approved.
   Following several bankruptcies and major consolidation in the early 1980s, there are currently only seven major Class I railroads in North America – Norfolk Southern and CSX in the eastern U.S., BNSF and Union Pacific in the West, the two Canadian railroads, Canadian Pacific and Canadian National, both of which are transcontinental railroads with trackage into the U.S., and Kansas City Southern, whose network in the Midwest extends far into Mexico.
   Rose said he thought further consolidation of the large railroads would only come if one of the railroads had serious financial problems or “due to population growth and the economy that we needed a significantly larger amount of railroad capacity, which we think would be a benefit of a consolidation.”
   “We’re not at that point,” he said.