Norfolk Southern Corp rejects $28.4bn offer

February 2016 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

The battle for railroad company Norfolk Southern Corp intensified in recent weeks. But despite the attention from Canadian Pacific Railway Ltd, Norfolk’s board of directors has remained forthright – the company is not for sale; for now.

In early December, Norfolk’s board of directors dismissed out of hand a second merger offer from Canada’s second largest railway, Canadian Pacific Railway Ltd, claiming that the Canadian firm’s bid of $28.4bn undervalued the company. The deal, had it been agreed, would have helped Canadian Pacific expand its vast transcontinental reach, and created the largest railroad in North America.

According to Nofolk’s board, the unsolicited, non-binding offer of $32.86 in cash and 0.451 shares in the newly combined company was “grossly inadequate”. The company also noted, in a statement announcing the rejection, that the proposed merger between Norfolk and Canadian Pacific would likely create a number of regulatory risks and uncertainties which would be difficult for the combined company to overcome. The company cited a white paper by two former commissioners from the Surface Transportation Board (STB), which claimed that regulatory approval would be hard to come by for such a deal. Federal regulators haven’t approved any major railroad mergers in more than 15 years since adopting tough restrictions in 2001. One of the few major railroad deals to have been approved in recent years was that which saw Warren Buffett’s Berkshire Hathaway conglomerate purchase BNSF railroad for $26.5bn in 2010.

“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,” said Norfolk’s chief executive, James Squires in a statement. “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. Yesterday we released a white paper by two former STB chairmen who believe that the STB would not approve any voting trust structure because there is no basis to determine that it would be in the public interest.”

The second offer from Canadian Pacific included less cash than the initial offer of $46.72 per share; however, it did include more equity than November’s initial offer. Under the terms of the revised offer, Norfolk shareholders would own 47 percent of the new company, up from 41 percent under the terms of the original offer.

In light of Norfolk’s refusal, executives of Canadian Pacific have made it known that they are considering a potential hostile attempt by taking their offer directly to Norfolk’s shareholders. The company is also courting activist investors in order to complete the deal. Notable activist shareholder Bill Ackman of Pershing Square Capital Management has pledged his support for the deal. Mr Ackman, who is on the board at Canadian Pacific, has stated that “the upside, if this transaction is approved, is enormous”.

Canadian Pacific expects a combined company to generate around $1.8bn in annual synergies. Norfolk’s CEO Mr Squires has refuted this claim, noting that the companies serve separate regions, only connecting at five points which would “severely” limit the possibility of generating operating synergies.

Furthermore, citing the regulatory concerns raised by Norfolk executives in light of Canadian Pacific’s first bid, the company has said that it is willing to use a voting trust in order to complete the transaction. Whether this would be enough to satisfy regulators in the US appears unlikely, as US regulators have long remained sceptical about consolidation in the railway space, having blocked US-Canadian mergers in the past.

Richard Summerfield