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CP Rail sweetens Norfolk Southern takeover offer with 'insurance policy'

CALGARY – Canadian Pacific Railway’s chief executive says he’s not averse to a bare-knuckle takeover brawl as the company enhanced its bid for Virginia-based Norfolk Southern with a variable payment that could add an addition $3.4 billion in payouts.

“If this is going to be a street fight then so be it,” Hunter Harrison said Wednesday. “The clock is ticking and it’s ticking down. And it’s time for some of us to take some action here if we’re going to see this transaction through.”

The revised deal would give Norfolk shareholders a security with a maximum payout of $25.

The value of the security would depend on the value of the combined company’s stock on Oct. 25, 2017, with no payment if the combined share price is above $175 at that time.

Activist investor and CP Rail board member Bill Ackman said shareholders should think of the security as an insurance policy that can be sold like an option.

“It’s a way to put your money where your mouth is and give shareholders an insurance policy, and give shareholders something of value they can sell immediately,” Ackman said on an investor conference call Wednesday.

He said the securities, which would trade on the New York Stock Exchange, add the equivalent of a US$9.50 increase in the bid price for Norfolk Southern and represents a 61 to 78 per cent premium.

But he said CP Rail believes that the combined company would be valued at more than $175 per share, and so no payout will be required.

Meanwhile, the core terms of the offer remain the same as last week’s revised proposal, with CP Rail (TSX:CP) offering to pay Norfolk shareholders US$32.86 in cash and 0.451 shares in the new company.

Norfolk Southern issued a statement in response to the latest offer saying the company’s board will “carefully consider” CP’s revised proposal while noting that the terms of the deal are largely unchanged.

The board unanimously rejected CP Rail’s previous enhanced offer as “grossly inadequate.”

Norfolk said last week’s offer values its shares at US$91.62 based on CP’s closing price on Dec. 7 which translates to a roughly US$27 billion valuation.

CP Rail has said the total of the stock and cash offer to Norfolk Southern shareholders, excluding the extra security, will be worth US$125 to US$140 in May if the deal is approved, resulting in a US$37 billion to US$42 billion valuation.

Norfolk’s board also noted that the proposal did not address the “substantial regulatory risks and uncertainties” of the proposed merger, which it believes regulators will not approve.

Under CP Rail’s proposed deal, Harrison would become chief executive of Norfolk and CP Rail converted to a voting trust while regulators review the deal.

CP Rail says it’s confident the deal will be approved by regulators, in part because it would add competition to the industry, and that the proposed deal structure is common in railway mergers because of the lengthy review process.

RBC analyst Walter Spracklin said the chances of a proxy fight have increased after Bill Ackman clearly said no further equity would be offered to Norfolk shareholders and the company laid out two proxy scenarios in the conference call.

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