MONTREAL – Canadian Pacific Railway has dropped the gloves in its battle to acquire Norfolk Southern after the U.S. railway immediately rejected a revised takeover offer.
The Calgary-based company enlisted the help of activist U.S. investor Bill Ackman to challenge the qualifications of Norfolk Southern CEO James Squires and opened the door to launching a hostile bid if the board of the Virginia company continues to oppose negotiations.
“We are going to work and do everything at our disposal to get this to the shareholders and get a resolution to it,” Canadian Pacific chief executive Hunter Harrison said Tuesday during a conference call. “If that calls for a proxy, so be it.”
After initially trying to strike a friendly deal, Canadian Pacific is now adopting the playbook successfully led by Ackman in 2012 to overhaul Canadian Pacific, the country’s second-largest railway.
Ackman, a large shareholder in Canadian Pacific, said Norfolk Southern’s opposition is the same response he faced when he moved to replace Canadian Pacific’s old guard. They denigrated Harrison’s plan to improve efficiency as “unrealistic and unachievable,” but under his leadership, costs were lowered ahead of schedule, Ackman said.
Harrison can bring about the same turnaround for Norfolk Southern, ultimately resulting in a merged company that would become North America’s largest railway, Ackman said.
“What I like about 71-year-old CEOs is they’re motivated to get things done promptly,” Ackman said of Harrison during the call.
Canadian Pacific (TSX:CP) said in a letter to Norfolk Southern’s CEO that under the amended bid, his company’s shareholders would own 47 per cent of the newly merged company, up from 41 per cent.
The revised deal would see Norfolk Southern shareholders receive $32.86 in cash and 0.451 shares of stock in the combined company — a bid Canadian Pacific characterized as a “substantially more financially attractive offer.”
The offer put forth last month would have seen Norfolk Southern shareholders receive $46.72 in cash and 0.348 shares in the new railroad.
Although the revised offer contains less cash and more equity than the one put forward a month ago, shareholders would receive them in May instead of the end of 2017.
Canadian Pacific said it believes the total value of the stock and cash offer to Norfolk Southern shareholders will be worth US$125 to US$140 per share in May when one of the railways, likely Canadian Pacific, is put into a voting trust and shares of the new company begin to trade in Toronto and New York.
Harrison would quit and sever all financial ties with Canadian Pacific to run Norfolk Southern until 2018 or 2019, when Canadian Pacific chief operating officer Keith Creel would take over to run the merged company.
The two companies would merge in the fall of 2017 after the U.S. regulator gives its approval. If the merger isn’t sanctioned, the voting trust would end and the two companies would cut ties, with Harrison remaining at the helm of Norfolk Southern.
Ackman said he hopes large shareholders in Norfolk Southern who have approached Canadian Pacific will call their company’s board and management to convince them to “come to their senses.”
He said Squires, who also serves as Norfolk Southern’s chairman, doesn’t have the operational experience to deliver improved performance as he has promised, in contrast to Harrison’s 50-year career as “the greatest railroader of all time.”
“What happens in situations like this is that pride gets in the way,” Ackman said of Squires’ efforts to preserve his job.
Norfolk Southern declined to respond to Ackman’s comments. But it said in a statement earlier in the day that Canadian Pacific’s new bid is less valuable than the previous one, which it already concluded was “grossly inadequate.”
“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,” Squires said in the statement, referring to the U.S. Surface Transportation Board.
Canadian Pacific said the revised bid would ease any regulatory concerns over the proposed merger, but Norfolk Southern released an opinion from two former STB chairmen who believe the regulator would not approve any voting trust structure because it wouldn’t be in the public interest.
Note to readers: This is a corrected story. A previous version contained inaccurate information on the valuation of the deal.