Canadian Pacific

CP-NS Merger Proposal Faces Widespread Political and Shipper Opposition

Feb. 18, 2016
CP asks NS shareholders to push their Company’s management to the negotiating table.

The management of Canadian Pacific seems to be prepared to walk away from its expensive and drawn-out campaign to acquire Norfolk Southern railroad.

CP’s offers to acquire NS were rejected three times by the NS board of directors late last year. CP recently announced that it has asked NS shareholders to pass a resolution at their annual meeting this spring directing the NS management to meet with and negotiate with CP.

On February 11 CP’s CEO Hunter Harrison told an investor conference organized by BB&T Corp. that CP is likely to abandon its attempt to acquire NS if the shareholder resolution fails to pass. CP had already abandoned a possible proxy battle to unseat the NS board.

CP also said it intends to seek approval by the Surface Transportation Board for placing its executive management in a voting trust while it runs NS during the period needed for the board to review any merger agreement between CP and NS, which could take up to two years. That may seem like putting the cart before the horse, but STB approval of voting trusts have happened with other rail mergers.

When CP first broached the voting trust idea last year, NS management told them they didn’t need to wait for the acquisition agreement to seek approval from the board. NS also said repeatedly that it does not believe the STB would ultimately approve a large rail merger of this type.

“While we remain fully confident in our comprehensive regulatory plan, shareholders of both CP and NS have recommended that we seek this declaratory order as a means to better understand the STB’s views on the proposed voting trust model ahead of any formal application,” Harrison said.

He added, “NS has cited supposed regulatory uncertainty regarding the voting trust model as a reason not to talk to CP, and NS proposed that we seek a declaratory order. We are skeptical that the STB will give a definitive ruling, especially when NS will not even sit down with us, but we are willing to go the extra mile if that is what it takes to get NS to the table.”

Quick Response from NS

The response from NS was not long in coming: “NS has already met with CP and publicly provided clear detail regarding the NS board’s concerns,” the company said. “While CP continues to publicly declare that NS should ‘talk to CP about a potential combination,’ we believe further discussions are not in the best interests of NS shareholders unless CP offers NS shareholders compelling value and addresses the regulatory issues inherent in its proposal.”

It is difficult to ascertain CP’s strategy at this point. From earlier reports it appeared that CP’s lenders and major shareholders were not willing to pony up more than the $28 billion in cash it had initially offered to purchase NS. This seems to rule out any serious possibility of a hostile takeover attempt, which would require CP to buy up stock from current shareholders at a significantly higher price than it currently trades for.

At an industry meeting Harrison tried to put the best face on what appears to be a costly miscalculation. “If this doesn’t work, we’re not going to have a funeral,” he said. “We would take a look at the use of other capital, maybe an aggressive buyback, maybe a little dividend. We’ll go about our business and life is good.”

Since CP’s merger offer first become public it has run into a buzzsaw of opposition from shippers, unions, shortline railroads and some prominent members of Congress. On February 1 the global freight and package delivery giant UPS sent a letter to the STB stating its opposition. “UPS is concerned that this combination would lead to diminished rail intermodal service levels and increased costs for all segments of rail customers,” the company told the board.

In January the STB responded to a letter from two House committee chairmen in a way that cast doubt on whether CP would be able to gain the board’s approval of a voting trust. The board pointed out that the law has changed since its earlier approval of voting trusts. “Should CP pursue a voting trust arrangement with NS in connection with a request for merger approval, the board would consider issues related both to unlawful pre-approval control and to the public interest,” the STB said.

Most recently CP asked the U.S. Department of Justice to investigate several Class 1 freight railroads for antitrust violations they allegedly incurred in organizing opposition to the merger.

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