CP issues revised buyout offer; NS rebuffs it as a 'reduced proposal'

By Jeff Stagl, Managing Editor

Canadian Pacific has sent a letter to Norfolk Southern Corp. outlining a revised buyout offer that's financially more attractive than the previous merger proposal, less risky and "dramatically reduces regulatory uncertainty" for NS shareholders, CP leaders announced this morning. The new offer addresses several concerns cited by NS about the initial buyout proposal, they said at an analyst conference.

E. Hunter Harrison

For each share of NS stock, a shareholder now would receive $32.86 in cash and 0.45 shares of stock in a new company that would own both Class Is. CP previously offered $46.72 in cash and a fixed exchange ratio of 0.35 shares in a new company.

CP estimates the total value of the stock and cash consideration in the new offer to be worth $125 to $140 per share at the closing of the transaction, which the railroad anticipates to occur in May 2016. The revised transaction offers a 37 percent to 53 percent premium to yesterday's closing price of CP stock at $91.52 per share and a 58 percent to 77 percent premium to the unaffected price of $79.14 per share, CP leaders said.

To alleviate shareholders' regulatory concerns, CP is prepared to close the transaction into a voting trust, they said. The trust would receive a substantial cash payment and shares in a new investment grade company, which would be listed on both the New York and Toronto stock exchanges, and would enable the transaction to be completed in mid-2016 instead of in late 2017 through the normal regulatory process, CP leaders said.

So far, there has been one face-to-face meeting with NS leadership, but more communication is necessary to better explore the benefits of a merger, said CP Chief Executive Officer E. Hunter Harrison during the analyst conference.

"We want to get them to sit down and engage in a dialogue with us," he said. "We see no downside to that."

However, NS leaders believe there still are downsides to CP's proposal. The Surface Transportation Board (STB) is not likely to approve the proposed voting trust and the new buyout offer is actually a reduced proposal compared with the first one's value, NS officials said in a press release.

Based on the closing price of CP shares yesterday, the new offer is valued at $91.62 per share versus the first proposal's value of $92.06 per share, they said. NS' board already unanimously determined the first offer was grossly inadequate, would create substantial regulatory risks and uncertainties that are highly unlikely to be overcome, and wasn't in the best interest of the company and its shareholders, NS officials said.

"Canadian Pacific's revised, reduced proposal is ... even more uncertain and risky given the decrease in the cash consideration," said NS Chairman, President and CEO James Squires. "In addition to being grossly inadequate, the proposal is based on a voting trust structure that we reviewed and do not believe would be approved by the STB."

James Squires

Yesterday, NS released a white paper by former STB commissioners Francis Mulvey and Charles Nottingham — who reviewed the voting trust proposal and initial buyout offer — that concluded a railroad can't assume control of another railroad without prior STB approval. The STB's approval process can last between 19 and 22 months.

"Current STB regulations, adopted in 2001, set a high bar for approval of a proposed major merger and related voting trust based on an untested public interest standard," NS officials said. "In our [experts'] opinions, the STB is not likely to approve CP's proposed voting trust or the CP-NS merger."

For U.S. Sen. Amy Klobuchar (D-Minn.), the most concerning aspect of the potential merger is that the rail industry's current antitrust exemption prevents the U.S. Department of Justice (DOJ) from blocking the combination even if it's predicted to harm competition. She has introduced legislation that proposes to repeal the antitrust exemption for railroads and make railroad mergers subject to full antitrust scrutiny by the DOJ.

"Significant consolidation has already occurred in the railroad industry,” Klobuchar wrote in a letter to U.S. Attorney General Loretta Lynch and STB Chairman Daniel Elliott. "Increased prices and diminished service, such as delayed deliveries, have burdened the shipping industry, American producers and those who rely on freight rail for distribution. We can all agree that competition leads to low prices, high-quality service, and innovation, but I am concerned that further consolidation will complicate efforts to promote those goals.”