Author Topic: Canadian Pacific Expected to Revise Terms of Bid for Norfolk Southern  (Read 1230 times)

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TORONTO— Canadian Pacific Railway Ltd. is expected to revise terms of its roughly $30 billion bid for rival Norfolk Southern Corp. as soon as Tuesday, with a complex plan that aims to put cash in shareholders’ hands ahead of a regulatory review of the deal.

Calgary-based Canadian Pacific, seeking to overcome Norfolk Southern’s rejection of its bid last week, is expected to offer $32.86 in cash and .451 of a share in a new holding company that would run the two railways independently until the Surface Transportation Board rules on the merger, according to a person familiar with the matter. Based on Canadian Pacific’s closing share price Monday, the two bids have a similar total value at just over $30 billion. Canadian Pacific’s previous offer would have paid $46.72 cash and .348 shares in the combined railroad for each Norfolk share.

A spokeswoman for Norfolk Southern declined to comment.

The new offer comes with less cash, but is designed to allay investor concerns about the risks of a prolonged regulatory review. Shareholders could be paid as soon as May, according to the people familiar with the plan, provided the regulator approves a temporary trust structure that would keep the two railways independent during the regulatory review, which could take up to two years.

Using its estimates for the combined company’s share price, Canadian Pacific values the offer at $40 billion, the people said.

The Canadian Pacific proposal is backed by activist investor William Ackman, whose Pershing Square Capital Management LP holds around 9% of Canadian Pacific, three years after leading a hard-fought proxy battle to replace a majority of the railroad’s board of directors. Mr. Ackman is set to discuss Canadian Pacific’s bid for Norfolk, Va.-based Norfolk Southern in a conference call Tuesday, along with Canadian Pacific Chief Executive Hunter Harrison, who is widely credited with leading an efficiency drive that boosted Canadian Pacific’s profitability.

Norfolk Southern rebuffed Canadian Pacific’s earlier merger offer Friday saying such a deal would create a “smaller, geographically inferior” railroad. Norfolk Southern CEO James Squires said Canadian Pacific’s offer was “opportunistically timed” to take advantage of a depressed share price that has been affected by lower commodity prices. Norfolk Southern shares are down over 13% over the past year and had fallen by as much as 33% before rumors of the deal surfaced.

Separately, Norfolk Southern released a report late Monday detailing the findings of two former Surface Transportation Board commissioners it retained to review Canadian Pacific’s first proposal, saying they found it “highly unlikely to be approved.” Even if approval was granted, it would come with a huge price tag in the form of environmental reviews and labor protection.

“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,” Mr. Squires said in the release. “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.”

Specifically, Canadian’s Pacific’s voting trust plan is unlikely to pass muster, the two former commissioners write. Canadian Pacific can’t implement its business plan for Norfolk Southern until after formal approval from the STB is granted. “No matter how CP executives are put in charge of NS management before the merger is approved, the STB likely would not be fooled into thinking that CP and NS are operating independently,” write Francis P. Mulvey and Charles D. Nottingham.

Under the revised offer, if the structure is granted, Canadian Pacific’s veteran CEO Hunter Harrison would sell his shares in the railway and take the reins at Norfolk Southern before retiring. Canadian Pacific would be run by its chief operating officer, Keith Creel.

For Canadian Pacific’s ambitious plan to work, Norfolk’s board would have to approve a merger agreement within several weeks. That would clear the way for an application to be submitted to the regulator, seeking approval to create a new holding company that would hold one of the railways in a trust. That structure would keep the railroads’ operations separate, pending the outcome of the regulatory review.

If the trust application is approved, shareholders of both railways would be asked to approve the deal, after which the cash and stock would be paid.

People familiar with the offer said Canadian Pacific’s banker, JP Morgan Chase and Co. , has signed a commitment letter to lend $10 billion to finance the potential merger.

Canadian Pacific is seeking to woo Norfolk Southern investors with Mr. Harrison’s track record. Under Mr. Harrison’s watch, Canadian Pacific has become one of North America’s most cost-efficient railroads, with an operating ratio of 59.9%.

The Virginia-based rail operator, meanwhile, is among the poorest-performing Class 1 railway in North America with an operating ratio of 69.7% as of the third quarter of this year. The operating ratio is a key railroad efficiency metric.