Monday, December 7, 2015

Rail Freight Collaboration Scuppered as Interest in Intermodal Cargo Volumes Rises

Threat of Regulators and 'Grossly Inadequate' Valuation Cited
Shipping News Feature
US – CANADA – The big news in the freight by rail sector is that having last month received an offer from Canadian Pacific (CP) of a possible collaboration, Norfolk Southern (NS) has unanimously rejected the terms proposed. The deal on the table was an unsolicited and highly conditional indication of interest to acquire the NS for $46.72 in cash per share and a fixed exchange ratio of 0.348 shares in a new company that would own the two North American rail giants, just as interest in intermodal cargo services seem to be increasing.

NS said that after a comprehensive review, conducted in consultation with its financial and legal advisors, the board concluded that the indication of interest was grossly inadequate and created 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. Chairman, President and CEO James A. Squires, said:

"We believe in our ability to generate greater shareholder value through execution of our strategy, delivering efficient and superior service to build a more profitable franchise based on price and volume growth, implementing efficiency measures, and increasing returns on capital to strengthen our financial performance, all while maintaining our disciplined capital return strategy.

“Norfolk Southern has made growth investments and we expect to realise the benefits of these investments in the years ahead, especially as our intermodal volumes continue to build. Specifically, we expect to achieve an operating ratio below 70 in 2016 with additional improvements over the next five years resulting in increasing ROE [return on equity] and an operating ratio below 65 by 2020. By maximising our asset utilisation, we believe we can achieve double-digit compounded EPS [earnings per share] growth over this period. In short, Norfolk Southern is well positioned to deliver compelling value to our shareholders."

"There is a high probability that, after years of disruption and expense, the proposed combination would be rejected by the Surface Transportation Board (STB). We also believe the STB would reject Canadian Pacific's proposed voting trust structure, and that there is no certainty that any other voting trust structure would be approved. Even if the proposed combination were ultimately to be cleared, it would be subject to a wide range of onerous conditions that would reduce the value of the stock consideration that has been proposed."

"We believe that Canadian Pacific's short-term, cut-to-the-bone strategy could cause Norfolk Southern to lose substantial revenues from our service-sensitive customer base. We also believe the proposed transaction risks harm to vital transportation infrastructure and the communities we serve. Any strategy that hurts our customers and the broader community is highly unlikely to receive regulatory approval and is inconsistent with the delivery of shareholder value over the long-term."

The Norfolk Southern board, in making its determination, considered several factors including one of the key point in CP’s proposal, which concerned the possibility of easing Chicago congestion issues, but NS reckoned that as it was the smallest Class 1 railroad in the area, its volumes were too small to impact rail traffic in Chicago and that the collaboration was likely instead to increase congestion.