Revised Rail Freight and Intermodal Cargo Bid Dismissed as 'Grossly Inadequate'

US – CANADA – Canadian Pacific (CP) just can’t take no for an answer, after it received a rejection of its initial offer to merge with Norfolk Southern (NS) to ‘rationalise’ rail freight and multimodal cargo operations, CP has sent a revised offer that the company says is ‘financially more attractive and dramatically reduces the regulatory uncertainty’, in the hopes of addressing any concerns NS shareholders had and persuading them to change their decision.

Following Norfolk Southern's rejection, Canadian Pacific took ‘exception to the claims, misdirection and mischaracterisation of its offer and the benefits such a combination would provide to customers, shareholders, the industry and the public’. In order to address the many various concerns NS highlighted, CP reviewed its offer in a bid to appeal more to shareholders by reducing the regulatory risk, making it more financially attractive by increasing the shareholders’ ownership of the pro forma company from 41% to 47%, and agreeing to complete due diligence in no more than three weeks while ‘contemporaneously negotiating definitive documentation’. In its revised presentation, CP said:

“To alleviate any regulatory concerns that NS shareholders might have, we are prepared to close the transaction into a voting trust. By utilising a voting trust, NS shareholders will receive a substantial cash payment and shares in a new investment grade company which would be listed on both the NYSE and TSX. Based on extensive work done by our lead transaction counsel, Simpson Thacher, and our United States and Canadian regulatory counsel, Stinson Leonard Street and Bennett Jones, we anticipate the closing and listing of shares to occur on 1 May 2016.

“At the closing of the transaction, NS shareholders will receive $32.86 in cash and 0.451 shares of stock in a new company which will own NS and Canadian Pacific. We estimate the total value of the stock and cash consideration to NS shareholders to be worth $125 to $140 per share at the closing of the transaction in May 2016. The revised transaction offers a 37% to 53% premium to today's closing price of $91.52 and a 58% to 77% premium to the unaffected price of $79.14 per share.”

Norfolk Southern has issued a statement saying that the consideration offered in this revised proposal is less than the prior proposal, which the Norfolk Southern board unanimously determined was grossly inadequate, created substantial regulatory risks and uncertainties that were highly unlikely to be overcome, and was not in the best interest of the Company and its shareholders.

On 17 November 2015, CP made an unsolicited proposal to acquire all the outstanding common shares of NS for $46.72 in cash and a fixed exchange ratio of 0.348 shares in a revised operation which would own the two companies. The total consideration of the initial proposal was valued at $92.06, but following careful consideration, and with the assistance of its independent financial and legal advisors, the Norfolk Southern board unanimously rejected this prior proposal. Chairman, President and CEO of Norfolk Southern James A. Squires, said:

"Canadian Pacific's revised, reduced proposal is not only less than what the Norfolk Southern board has already found to be grossly inadequate, it is even more uncertain and risky given the decrease in the cash consideration. 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.

“The Norfolk Southern board is committed to creating value for shareholders and exploring all bona fide opportunities to enhance value. In that regard, the Company retained nationally recognised regulatory counsel and former Surface Transportation Board (STB) commissioners to carefully evaluate the regulatory landscape under the 2001 merger rules. The former STB commissioners have concluded that the STB would be highly unlikely to approve a voting trust structure or the merger transaction, as neither would be in the public interest. The Norfolk Southern board remains confident that the continued execution of its strategic plan is superior to Canadian Pacific’s grossly inadequate and high-risk proposal.”

The white paper to which Squires refers reviewed voting trust issues and the original merger transaction proposed by Canadian Pacific. Collated and investigated by former STB commissioners Francis Mulvey and Charles Nottingham, the white paper concluded:

"As simple background, rail carriers cannot assume control of another carrier 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. In our expert opinions, the STB is not likely to approve CP's proposed voting trust or the CP/NS merger."

Photo: Canadian Pacific met with a frosty reception.