Canadian Pacific sweetens offer to buy Norfolk Southern railroad with variable payment

OMAHA, Neb. – Canadian Pacific is increasing its offer to buy Norfolk Southern railroad by adding a payment that would vary depending on the stock price of the new company.

Canadian Pacific CEO Hunter Harrison said Wednesday that his company remains committed to the deal despite Norfolk Southern’s opposition. He wants shareholders of the Norfolk, Virginia, railroad to decide whether to pursue it.

Norfolk Southern has already rejected two previous offers from Canadian Pacific, and the two railroads have started issuing dueling news releases at every step of the process. But Harrison said he still hopes to sit down and negotiate a deal with Norfolk Southern.

“I just don’t understand the rationale of saying we won’t talk,” Harrison said.

Norfolk Southern said in a statement that its board will carefully review the latest offer, but it noted that little had changed from the earlier offers it rejected.

Canadian Pacific said its new offer could add as much as $3.4 billion to its previous offer that it estimated was worth between $37 billion and $42 billion. That value is based on the projected value of stock in a new company that would own both railroads.

Norfolk Southern has said the previous offer was worth roughly $27 billion based on current share prices and “grossly indequate.”

In the latest offer, Canadian Pacific is offering to pay Norfolk Southern investors up to roughly $11.30 per share more if shares of the combined company are worth less than $175 in October 2017. But if the shares are worth more than $175, that payment would be reduced to zero.

One of the key questions is whether federal regulators would approve such a merger. No major railroad mergers have been completed since the Surface Transportation Board issued tough rules for them in 2001.

Canadian Pacific officials remain confident this deal would be approved because they have included several details designed to increase competition between railroads.

But Norfolk Southern has said it doesn’t think regulators would approve the deal, so investors are better off if the railroad remains independent.

Canadian Pacific’s offer has the support of board member Bill Ackman, who leads activist investment firm Pershing Square. Ackman said Wednesday that if this Norfolk Southern deal fails, Canadian Pacific will pursue other railroads.

Last fall, Canadian Pacific approached CSX railroad about a possible merger, but those talks didn’t progress beyond initial discussions.

Shares of Canadian Pacific Railway Ltd. gained 63 cents to $125.63 in afternoon trading Wednesday. Norfolk Southern Corp. shares fell $1.80, or 2 per cent, to $89.22.