Canadian Pacific sweetens bid to acquire Norfolk Southern

Canadian Pacific today offered a revised, enhanced offer for Norfolk Southern Corp.

The latest offer will give NS shareholders the opportunity to receive $32.86 in cash and 0.451 share of stock in the new combined company for each NS share. The new offer also includes 0.451 of a contingent value right (CVR) per share.

The details of the revised offer were discussed this morning in a conference call with analysts and CP Chief Executive Officer E. Hunter Harrison, CP Chief Financial Officer Mark Erceg and CP shareholder Bill Ackman of Pershing Square Capital Management.

CP officials described the CVR "as an insurance policy against the level of the future share price." The offer reflects the confidence of CP officials in the value that NS shareholders would receive in the transaction, they said.

The offer is the third and latest volley in CP's attempt to take over NS. Based on estimates for the intrinsic value of what would become the combined company, the latest revised offer represents a 61 percent to 78 percent premium to the undisturbed NS share price, Ackman said.

On Monday, NS announced that its board unanimously rejected CP's second cash-and-stock offer and described it as "grossly inadequate." Yesterday, CP responded to an NS white paper written by former Surface Transportation Board members Chip Nottingham and Frank Mulvey that NS released last week. The white paper indicated doubt about the proposal to set up a voting trust structure and whether the deal would receive regulatory approval.

In its response to the white paper, CP said NS was wrong to take the position that the STB wouldn't approve the proposal, and this morning, Harrison said the chances are "pretty good" that the trust structure would be approved.

Under the proposal, CP would be placed in a trust while STB reviews the proposed formation of a new, combined company. Harrison would take over as CEO of NS during that time.

Harrison expressed disappointment that the tone of the takeover bid had become a "street fight." He also noted that he believed BNSF Railway Co.'s interest in the potential merger was an indication that regulatory approval is possible.

"If this can't be approved, why would [BNSF] care?" Harrison said.

CP officials said that NS' board has so far refused to discuss the deal, although initially Harrison met with NS President and CEO Jim Squires.

"I just don't understand why they won't talk," Harrison said.

If the NS board won't allow its shareholders to have an up or down vote on the CP proposal, the other option would be to push for a proxy vote to replace NS management and the board of directors at NS' annual shareholder meeting in May, Ackman said.