The board of U.S. eastern railroad Norfolk Southern Corp. (NS) today rejected a third buyout proposal by Canadian Pacific Railway (CP), calling CP's latest offer "grossly inadequate," not in the best interests of NS shareholders, and creating regulatory risks that would be hard to overcome.
The decision by the Norfolk, Va.-based company's board sets up a potential proxy battle for NS shares. CP's largest shareholder, activist investor William A. Ackman, hinted last week that the railroad could get aggressive in its $27 billion pursuit of NS if the company rejected CP's proposal, which was unveiled Dec. 16. Ackman runs Pershing Square Capital, a New York-based hedge fund.
NS' board, which voted unanimously, said CP's third offer was no different than its second proposal, other than adding a financial mechanism called a "contingent value right." Each right would provide NS shareholders with a cash payment from CP equal to the difference between the average share price of a CP-NS combination from April 20 to August 20, 2017, and US$175/share, up to a maximum of US$25 for each right. In a letter to CP Chairman Andrew F. Reardon and CEO E. Hunter Harrison, NS said CP's latest offer would still fall short even if each right were priced at the high end of CP's suggested range, a level NS said its advisors thought to be unrealistic.
NS repeated its claim that CP's plan to put itself in a voting trust and have Harrison run NS while the Surface Transportation Board (STB), the U.S. agency that rules on rail mergers, evaluates the combination—which might be as long as 22 months—would not pass muster at the STB. NS also restated that CP could seek an immediate declaratory order from the Board on its proposed voting-trust structure, a ruling the agency is allowed to make in instances like this. The fact that CP hasn't acted "shows a lack of confidence in your proposed structure," NS told Reardon and Harrison.
At press time, CP had not posted a statement on its web site, and a spokesman didn't return a request for comment. The railroad's last public comment came two days ago, when it said in a statement posted on its site that its plans to operate the combined entity would help ease the chronic congestion at Chicago, where six major railroads converge and which is the busiest rail-freight hub in North America. CP has proposed that if the combined company failed to provide adequate service or competitive rates, it would allow another carrier to operate from a connecting point on the combined company's tracks and into its terminals. CP also said it would end a practice in the U.S. under which an origin railroad dictates where it interchanges a customer's freight with another carrier, even if other interchange points are more advantageous to the shipper. The practice, which can create a phenomenon known as "bottleneck pricing," is illegal in Canada.
In the statement, CP took swipes at Omaha, Neb.-based Union Pacific Corp. and Jacksonville, Fla.-based CSX Corp., two big U.S. railroads that CP said oppose its buyout of NS. Calgary-based CP said the same railroads that object to a merger that would improve shipper options through and around Chicago plan to halt service through the city starting at different times on Christmas Eve until 7 a.m. on Dec. 26. CP said that the North American economy "does not take vacations" and that many shippers require service through Chicago every day of the year, regardless of holidays and weather conditions.
Fort Worth-based BNSF Railway Co., which was not mentioned in CP's statement, is reportedly considering a competing bid for NS. According to an industry source, Warren E. Buffett, the billionaire businessman and investor whose Omaha-based Berkshire Hathaway Inc. holding company controls BNSF, believes the CP-NS deal is not in the public interest.