Canadian Pacific took its bid to acquire Norfolk Southern to the court of public opinion on Wednesday by releasing the letter that CP CEO E. Hunter Harrison sent to NS chief James Squires proposing that the two companies merge.
Also, NS confirmed that it had received what it termed “an unsolicited, low-premium, non-binding, highly conditional indication of interest from Canadian Pacific.”
NS said CP offered to buy NS stock for $46.72 per share in cash and a fixed exchange ratio of 0.348 Canadian Pacific share per Norfolk Southern share. NS said that represented a premium of less than 10 percent.
Railway Age reported on Wednesday afternoon that CP shares stood at $138.58 at the close of Nov. 17 trading on Wall Street, well below its 52-week high of $209.98, and modestly above its 52-week low of $129.83.
NS shares closed at $86.97, compared to a 52-week high of $117.64 and a 52-week low of $72.10.
At the Nov. 17 stock closing prices, 0.348 per CP share times $138.58 would equal $48.23 per share.
Add to that CP’s offer of $46.72 in cash per NS share and the result is $94.95 per share or a 9.2 percent premium over the NS $86.97 closing price.
In releasing the letter that Harrison sent to Squires, CP said it wanted “to clarify the details of a proposal that would result in the creation of a pro-competitive, pro-customer, coast-to-coast transportation solution.”
Further, CP said in a statement that it was seeking to “correct any misconceptions about the sizable premium offered to NS shareholders.”
The letter to Squires was dated Nov. 9. Of late, NS stock has been on an upswing due to market speculation about the possible merger with CP.
CP also acknowledged that Harrison and Squires met last Friday as had been reported by the Wall Street Journal.
Aside from the details about how CP proposed to buy NS stock, Harrison laid out a list of benefits that a CP-NS combination would achieve:
- Creates [a] transcontinental rail network connecting the major industrial production and population centers across North America, [with] 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 [and] enhanced service offering to shippers. [It] combines two premier railroads with exceptional safety records.
- More than US$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 EPS accretion with run-rate synergies.
- Strong balance sheet, targeting mid BBB rating with approximately 4 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 process
- Financing commitment of US$14.2 billion from J.P. Morgan Securities LLC.
In the letter, Harrison wrote, “Moreover, as our combined network creates more comprehensive end-to-end shipment solutions for our customers while reducing congestion in key corridors such as Chicago, network capacity will expand, allowing us to improve service and lower costs—which is both pro-shipper and pro-competition. A combined network will also lead to faster growth for the new entity versus what either of us would be able to achieve on our own and, importantly, would create a larger, more diversified book of business less dependent on volatile commodities such as crude oil or thermal coal.”
Harrison said the United States and Canada would benefit from “having an end-to-end shipment solution that improves safety, reduces highway congestion, improves service, lowers cost and increases overall freight capacity (which is vital to support expanded economic growth) behind an environmentally friendly form of transportation funded exclusively with private versus public expenditures.”
The letter said the offer for NS stock had received unanimous approval from the CP board of directors and listed the law firms and financial advising companies that CP had retained to review the merger and guide it through the regulatory review process.
A financial analyst told Railway Age that the letter is likely the first step in a long process by which CP intends to go directly to NS shareholders to win support for the merger.
“However, the current premium may not be attractive enough for NS management and shareholders,” said Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl.
“The fact that CP decided to make a public appeal to NS management likely means that private talks were not very fruitful and CP now hopes that various stakeholders could help sway NS’s leadership,” Seidle said. “If these efforts fail, we would not be shocked if CP decided to go directly to NS shareholders, who, we believe, may be willing to listen given current macroeconomic conditions.”