Canadian Pacific is looking to merge with fellow Class I railroad Norfolk Southern, but NS appears less than receptive to the offer, referring to it as a “low-premium” offer in a statement Tuesday.
Canadian Pacific has publicized a letter sent to U.S. Class I railroad Norfolk Southern Corp. on Tuesday that outlines a merger proposal worth an estimated $28 billion.
According to a statement from the railway, CP is offering a 50/50 cash and stock transaction in which NS shareholders would receive $46.72 in cash and 0.348 shares of stock in the combined company for each share of Norfolk Southern.
In the letter, CP Chief Executive Officer E. Hunter Harrison and Board Chairman Andrew F. Reardon listed a multitude of potential benefits for NS shareholders, including:
- The creation of a transcontinental rail network connecting the major industrial production and population centers across North America.
- Global reach through premier ports located across the U.S. Gulf, Atlantic and Pacific North American coasts.
- Integrated operations across at least 4 major rail gateways.
- Enhancement of service offering to shippers.
- The combination of two premier railroads with exceptional safety records.
- More than $1.8 billion in annual operating synergies achieved over the next several years.
- Substantial tax savings in addition to operating synergies.
- Up to 45 percent pro-forma earnings per share (EPS) accretion with run-rate synergies.
- Strong balance sheet, targeting mid BBB rating with approximately four times debt/EBITDA, and significant operating cash flow to deleverage to target leverage of 2.5 times within 2.5 years.
- Collaborative Surface Transportation Board regulatory processes.
- A financing commitment of $14.2 billion from J.P. Morgan Securities LLC.
Harrison and Reardon said the proposal has received the unanimous support of CP’s board, but will remain subject to “satisfactory completion of due diligence, the negotiation, execution and delivery of mutually satisfactory definitive agreements, approval of the definitive agreements by your and our boards of directors, approval of the transaction by your and our shareholders, and receipt of customary regulatory approvals.”
This may be easier said than done though, as Norfolk Southern released a separate statement late Tuesday that referred to the proposal as an “unsolicited, low-premium, non-binding and highly conditional indication of interest.” NS also warned that the consolidation of two Class I North American railroads “would face significant regulatory hurdles.”
“The company’s board of directors, in consultation with its financial and legal advisors, will carefully evaluate and consider this indication of interest in the context of Norfolk Southern’s strategic plans, and its ongoing review of opportunities to enhance stockholder value through strategic, financial and operational measures and pursue the best interests of the company and its stockholders,” the Norfolk Va.-based railway said.
CP said it has worked extensively with its lead transaction counsel Simpson Thacher, its U.S. regulatory counsel of Stinson Leonard Street and Canadian regulatory counsel Bennett Jones, “to confirm not only the feasibility of the proposed transaction but also our plan to ensure a smooth and expeditious review and approval process.” The company has also engaged the services of J.P. Morgan Securities, which has issued a “highly confident letter” regarding CP’s ability to finance the proposed transaction.
CP said based on its volume weighted average price (VWAP) of $191.27 Canadian (U.S. $143.39) its proposal represents a 23 percent premium to NS’s 45-day VWAP of $79.14 per share. NS pointed out, however, the approximately $94.95 per share offer represents a premium of less than 10 percent based on Tuesday’s closing price of $86.97.
Shares in Norfolk Southern have risen steadily since news of the potential merger with CP broke last week and jumped another 6.1 percent to $92.20 in early morning trading Wednesday.
Both companies have seen their stock fall dramatically this year due to weak shipping volumes, particularly in coal and oil. Canadian Pacific shares had dropped 20 percent in 2015 prior to the initial merger reports, while Norfolk Southern fell 27 percent during the same period.
A takeover of NS, the second largest railway in the eastern United States, would significantly expand CP’s reach in the eastern third of the country. Norfolk Southern operates about 20,000 route miles of track in 22 states and serves all of the major container ports along the East Coast, connecting with western railroads in Chicago and Kansas City, Mo., both of which are also served by Canadian Pacific.
CP attempted a similar merger with NS rival and largest East Coast U.S. freight railroad CSX Corp. last year, but talks ultimately failed due to disagreements within upper management regarding the effects of consolidation on things like congestion.