CP responds to NS board's latest rejection

[Editor's note: This story has been updated to include CP's response, which was issued this afternoon.]

Norfolk Southern Corp.'s board has unanimously rejected Canadian Pacific's latest merger proposal, NS officials announced today.

The Norfolk, Va.-based Class I turned down CP's third proposal, which offered to acquire NS for $32.86 in cash, a fixed exchange ratio of 0.451 shares in a new company that would own NS and CP, and 0.451 of a contingent value right (CVR), according to an NS press release.

In a letter to CP Chief Executive Officer E. Hunter Harrison and CP Chairman Andrew Reardon, NS Chairman, President and CEO Jim Squires and Lead Director Steven Leer said NS board rejected CP's latest offer because it "is grossly inadequate, creates substantial regulatory risks and uncertainties that are highly unlikely to be overcome, and is not in the best interest of the company and its shareholders."

CP's third offer, pitched publicly on Dec. 16, differed from its previous offer in that it included the CVR component. In response, Squires and Leer said that NS' financial advisers believe that the CVR "would trade at a significant discount."

The letter also reiterated the NS board's contention that the proposed merger would not be approved by regulators, and called out Harrison for publicly declaring that the NS board is not "engaging or "meeting" with him.

"There is no basis to meet until you both make a compelling offer and address the regulatory issues, which you have the ability to do by seeking a declaratory order. We also note your repeated public statements that you are not willing to increase your offer regardless of whether we were to meet," the letter stated.

CP officials said they were disappointed in the NS board's response to the revised offer, and issued the following statement:

"CP remains confident that a CP-NS combination would secure regulatory approval as a seamless coast-to-coast single-haul service benefits shippers, the industry and the public, and would generate tremendous shareholder value. 

"It is apparent that neither the executive leadership at NS nor its board of directors are willing to sit down in an open and constructive dialogue about this transformational opportunity and that the interests of the NS board are not aligned with the best interests of NS shareholders. Therefore CP will review its strategic alternatives."

NS to consolidate coal docks in northern Ohio
Meanwhile, NS announced yesterday that it is consolidating two of its coal docks in northern Ohio as part of an effort to reduce costs in a weak coal market. NS plans to idle its Ashtabula, Ohio, Coal Pier and shift operations to the railroad’s Sandusky, Ohio, Dock.

Ashtabula will continue to operate until all coal inventories have been transloaded, which is expected to be completed by May 2016. The facility will remain idled until and if market conditions warrant reopening, company officials said in a press release.

The consolidation will eliminate 21 positions. Those employees may apply for other positions in the company, NS officials said. Earlier this month, NS furloughed 13 employees at Ashtabula due to the weak coal market. Six employees will continue to oversee security and environmental systems at Ashtabula.

"Norfolk Southern is adapting to evolving market conditions by realizing efficiencies and optimizing our infrastructure to support long-term growth," said NS Senior Vice President of Operations Mike Wheeler.

NS has owned and operated the Ashtabula coal pier since 1999. The facility primarily serves the thermal coal market, transloading coal from Ohio, Pennsylvania, and West Virginia to Canada and U.S. destinations by ship. CSX Transportation also has rights to use the Ashtabula dock.