CP Gives Up Trying to Acquire NS

Canadian Pacific gave up on Monday its struggle to acquire Norfolk Southern.

The Calgary-based railroad said it was withdrawing a resolution that was to have been voted on by NS shareholders that would have directed NS management to discuss a merger.

The NS board of directors had rejected three offers from CP to buy NS stock.

CP said in a news release that it would have “no further financial offers or overtures to meet with the NS board.”

That wording of the statement appears to leave open the possibility of trying again at a later time.

“We have long recognized that consolidation is necessary for the North American rail industry to meet the demands of a growing economy, but with no clear path to a friendly merger at this time, we will turn all of our focus and energy to serving our customers and creating long-term value for CP shareholders,” said CP CEO E. Hunter Harrison.

CP has contended for several months that a merger with NS would create a North American transcontinental railroad that would enhance competition, ease freight congestion and improve service to shippers.

NS said in a statement that it remains committed to its five-year strategic plan to streamline operations, cut expenses and maintain superior customer service.

“The Norfolk Southern team has made significant progress and is on track to achieve annual productivity savings of more than $650 million and an operating ratio below 65 percent by 2020,” NS said. “We are confident the continued execution of our plan will deliver superior value to all of the company’s stakeholders by best positioning Norfolk Southern to succeed.”

The NS statement also thanked the company’s shareholders for their views and support. The company also lauded its employees for their hard work and dedication.

CP may have been motivated to give up its efforts to acquire NS after the antitrust division of the U.S. Department of Justice filed a statement with the U.S. Surface Transportation Board that described CP’s plans as being anti-competitive by compromising the independence of NS during the merger review process.

The Justice Department said that although Harrison and select CP executives would have cut their connections with CP, the latter would still exert a great deal of influence over NS and that would effectively combine the two carriers.

Saving Pennies to Bolster an Exective Image

Cancellation of the steam program, putting a posh executive resort up for sale and now not sending the executive train to the Masters golf tournament in Georgia.

None of those actions that have been undertaken by Norfolk Southern will do anything to improve the company’s bottom line, but they will have symbolic value in the months ahead as the NS board of directors continues to fight an unwanted takeover bid by Canadian Pacific.

Trains magazine reported last week that NS didn’t send its executive train to the golf tournament in Augusta, Georgia.

It remains to be seen, but chances are the executive train won’t be going to the Kentucky Derby either.

In both instances, NS has historically sent its executive train to both high-profile sporting events to entertain shippers, public officials and executives of other railroads.

Just as predictable as flowering trees in the spring, the NS executive train has departed Altoona, Pennsylvania, in the morning and passed through Northeast Ohio on the Fort Wayne Line about a week before the Derby, which is held on the first Saturday in May.

But when you are trying to cut costs, executive perks can become expendable. It is all about promoting an image.

“We do not have business cars at the Masters,” NS spokesman Rick Harris told Trains. “It was an internal business decision.”

CSX and BNSF do have their executive trains in Augusta, but they are not currently the target of a takeover bid by CP or someone else.

Norfolk Southern is not cutting expenses because it is unprofitable.

NS may be suffering from lost coal traffic, but it is not losing money. It is far from being Penn Central or Erie Lackawanna, two railroads that served the Eastern United States that lost a gondola load of money, seeking bankruptcy protection as a result.

No, the issue is a matter of how much money NS makes and whether it is doing enough to make more of it.

In that regard, the primary concern of NS executives is not just prevailing over CP as it is pleasing Wall Street analysts who can influence the buying and selling of NS stock.

That is not to say that the CP takeover bid in unrelated to what Wall Street analysts think.

When a company is unable to increase its financial performance with substantial new business, it often tries to make itself look good by cost cutting.

There is a saying that you can’t cut your way to growth, but you can make your financial statement look better in the short term, which is mostly what Wall Street cares about.

Hence, NS has announced a five-year strategic plan to achieve $650 million in annual savings and reduce its operating ratio to 65 percent or lower by 2020.

The plan also talks about finding new business. The strategic plan is filled with long-term goals and objectives, but it was created for short-term benefit.

Whether the five-year plan ever achieves its objectives is largely immaterial at this point. It shows that current management is doing something now to bolster the balance sheet.

In the short term, NS management is most concerned about the May 12 annual meeting at which interests representing CP will propose a resolution directing NS to discuss a merger with CP.

NS CEO James Squires will point to a laundry list of actions his company has undertaken to reduce costs as a way of arguing against the resolution and against the need to merge with another company.

Not operating the executive train to a golf tournament will save only a few pennies in the scheme of things, but keeping the executive horses in Altoona will be worth valuable debating points.

The last thing Squires needs is a dissident shareholder harping about how NS is spending money on “frills.”

Squires needs to create the impression that he and the current NS management are doing all they can to turn things around and that they know what they are doing.

It is all about building an image that instills confidence in the current management among stockholders.

That might be enough to persuade enough of them to vote down the CP-sponsored resolution.

Saving pennies is the sort of thing that you do when you are in a tough situation that has no easy or immediate solution. You play for time and hope to ride out the storm.

It must gall Squires and the NS directors that CP’s E. Hunter Harrison has all but called them incompetent by saying that if Harrison were the CEO of NS he could realize $1.2 billion in savings by implementing his precision railroading operating plan.

In time, NS will either chase Harrison away or succumb to him. In either case, it seems likely that the NS executive train will be back at the Masters in 2017.

If NS triumphs over CP, it will be able to return to a sense of normalcy, which means wooing shippers, politicians and other railroad executives by taking them for a train ride.

If Hunter gets what he wants, he, too, will need to reach out to the same constituencies.

And what’s spending a few pennies to do that? It won’t affect the bottom line but could go a long way toward helping build a badly-needed positive image.

DOJ Opposes CP Voting Trust Arrangement

A powerful opponent has lined up in opposition of Canadian Pacific’s plan to acquire Norfolk Southern.

The U.S. Department of Justice on Friday told the U.S. Surface Transportation Board that CP’s proposed voting trust would compromise the independence of NS before the STB could finish its review of the proposed merger.

CP has proposed placing itself into control of a voting trust during the merger review process.

CP CEO E. Hunter Harrison and select members of his CP management team would then take over the management of NS.

“Canadian Pacific’s voting trust proposal would compromise Norfolk Southern’s independence and effectively combine the two railroads prior to completion of the STB’s review,” said Assistant Attorney General Bill Baer of the Justice Department’s Antitrust Division. “That makes no sense. We urge the STB to preserve its ability to review the impact of the proposal on competition and consumers before Canadian Pacific starts scrambling the eggs.”

The Justice Department said the two railroads would have an economic incentives to align their business strategies before the merger has been reviewed and that those arrangements would be difficult to undo if the STB rules against the merger.

“The STB should reject the proposed voting trust structure because it risks altering the competitive landscape between the two railroads and indeed the entire rail system in a way that could not be reversed if the STB rejects the merger,” the Justice Department said in a filing with the STB.

“In reality . . . CP hopes to use Mr. Harrison as its proxy to implement the changes it desires at NS,” the Justice Department filing said.

Earlier this year, CP asked the STB to review whether a hypothetical trust structure would pass legal muster.

The STB has not said when it will rule on that request, but it has set an April 13 deadline for the submission of statements by interested parties.

Typically, a voting trust is put in place at the company to be acquired not at the company making the acquisition.

A CP spokesman expressed disappointment with the position of the Justice Department.

“Voting trusts have long been recognized by the STB, regulators and the courts as an effective means of insulating the carriers from unlawful common control during regulatory review,” said CP spokesman Martin Cej. “We strongly believe Mr. Harrison would be completely independent and clear from any influence at CP if he were to assume the role of CEO at NS.”

CP Issues White Paper Making the Case for ‘Precision Railroading’ at Norfolk Southern

Canadian Pacific has given Norfolk Southern stockholders a reading assignment in advance of the NS annual meeting on May 12.

In a white paper, CP seeks to make the case for how its “precision railroad philosophy” would improve NS operations by transforming it from an “industry laggard to leader.”

“Politicians, shippers and others are calling for a strong, healthy and high-performing rail system yet no one has the stomach to challenge the status quo,” said CP CEO E. Hunter Harrison in the paper. “Clearly, moving goods reliably and efficiently is top of mind for everyone in the industry; we believe precision railroading and a CP-NS combination address those challenges.”

The white paper, which was part of a series that CP has issued over the past few months to make the case for its proposed takeover of NS, said that precision railroading has enabled CP to reduce its operating ratio, improve service, reinvest record amounts of dollars in its network and create “significant shareholder value.”

A PDF version of CP’s latest white paper can be downloaded at http://www.cpconsolidation.com.

CP described precision railroading as a tried and tested approach that has already transformed two of the worst-performing Class I railroads into top performers.

The latter was a reference to CP and Canadian National, where Harrison was CEO for several year. Harrison also applied his precision railroading approach at the Illinois Central when he headed that railroad before moving to CN.

“Over the last 20-plus years, Mr. Harrison’s execution of precision railroading has transformed three Class I railroads into the best-run railroads in the world,” CP’s white paper said. “The likelihood is high that, under his leadership and guidance, NS can achieve similar success and perform far better than its management currently believes possible.”

The white paper noted that the previous management of CP had claimed during a 2012 proxy fight with Harrison and financier Bill Ackman of Pershing Square Capital Management that precision railroading would not work at CP.

“But precision railroading is a set of non-discriminating principles that can be effectively applied to any railroad in the world,” the white paper asserts. “Geographic, network, and business mix differences are irrelevant in the application of the underlying principles that guide day-to-day decisions.”

Harrison has stated that his operating philosophy has five foundations of improving customer service, controlling costs, optimizing asset utilization, operating safely, and valuing and developing employees. “These five foundations can be applied to any railroad with the same result,” the paper said.

The white paper said that after implementing precision railroading practices, CP was able to slash transit times, increase system velocity and reduce terminal dwell times.

By increasing efficiency, CP cut its locomotive fleet size by 40 percent and saw its operating ratio fall from 81 percent to 61 percent.

“The prevailing view in the rail industry is that more locomotives, more cars and more crews allow for the movement of more volume,” CP said. “Precision railroading challenges this view.

“Because track and yard capacity is finite, adding more equipment creates congestion and slows down the system. While it may sound counterintuitive, reducing fleet size actually enables a railroad to move more volume. By running fewer and heavier trains, faster and on schedule, assets can be utilized far more productively and can yield significant savings.”

As an example of how precision railroading has worked, CP said it has increased domestic intermodal traffic by 19 percent between 2012 and 2015.

CP claims it could achieve $1.2 billion annual savings at NS by shifting it to the precision railroading model.

Among other things, Harrison has suggested that NS would be able to mothball up to a third of its locomotive fleet.

NS CEO James Squires, though, has described precision railroading as a “short-term focused operating model” that would result in service deterioration, diversion of traffic to trucks, and a loss of service-sensitive customers.

Squires said that the CP approach would mean unacceptably deep reductions in capital spending and employment levels.

NS has begun to implement its own five-year strategic plan to gain $650 million in annual savings by 2020 by reducing expenditures, seeking new traffic and increasing profitability.

CP interests are sponsoring a resolution to be voted on by NS shareholders that would direct NS management to discuss a merger with CP.

The resolution is non-binding and the NS board of directions is opposing it. The NS board also has rejected three offers from CP to buy NS stock.

Trains magazine interviewed a former CP executive who said that Harrison deserved some, but not all of the credit for improvements since he took over after the 2012 proxy fight.

The executive, who Trains did not name, said that under CEO Fred Green, CP had begun making progress by cutting $80 million from equipment rental payments, saving $150 million for the pension plan, closed intermodal terminals, reduced fuel consumption and begun operating longer trains with the use of distributed motive power.

“We were a lot further along the curve than people realize,” the former executive said.

The executive, though, did give Harrison and his team credit for being more aggressive through such moves as shutting down humps in several yards.

“Hunter’s a good railroader. He gets it,” the former executive said. “He drives the assets.”

The former CP executive operational efficiency and cost-cutting were not the sole drivers of CP’s rebound.

“Fundamentally the franchise needed top-line growth,” the former executive said. “CP needed to flex its muscles in terms of pricing. It’s done that well.”

Even before Harrison had arrived, CP management has discussed whether it was being aggressive enough with above-inflation pricing.

After Harrison arrived, CP’s total revenue increased by 18 percent between 2012 and 2015 although its total carloadings fell by 1.5 percent.

During that same period, CN saw its total revenue rise by 27 percent and its traffic grow by 8 percent. Last year CN led North American Class 1 railroads with the lowest operating ratio at 58.2 percent.

Whether the success of CN and CP in using precision railroading would translate well at a U.S.-based Class 1 remains an open question.

Trains magazine quoted railroad analyst Anthony Hatch as saying that it is not possible to draw conclusions about the growth rates of CP and CN due to their different traffic mixes, particularly their bulk and carload business.

“But you can say that CN has done a terrific job leveraging the precision railroading legacy of EHH into the New Model Railroad — one that combines efficiency, productivity, and marketing to grow faster than the rails as a whole, transports as a whole, and the continental economy,” Hatch said.

A former NS executive, though, is not enthusiastic about precision railroading as it might apply to NS.

In an interview with Trains, former NS CEO Charles “Wick” Moorman called precision railroading a recipe for disaster.

“If Hunter puts out an order to park 700 locomotives, I don’t even give it a week,” Moorman said. “The service would collapse. It’s just that easy.”

Pa. Congressman Opposes CP-NS Merger

A Pennsylvanian congressman is among the latest in a long line of public officials to express opposition to a proposed takeover of Norfolk Southern by Canadian Pacific.

Bill Shuster, who is chair of the House Transportation and Infrastructure Committee, said he did not believe a CP-NS merger would be in the best interests of the U.S. freight transportation system, railroad employees, rail shippers and short-line railroads.

Shuster thus joins other members of the Pennsylvania congressional delegation and Gov. Tom Wolf in raising objections to the proposed merger.

NS is a major employer in Shuster’s district, which includes Altoona and the Juniata Locomotive Shop.

“A strong, healthy, and well-functioning freight rail system is critical to the movement of goods in this country,” Shuster said in a statement. “However, CP’s pursuit of a merger over the last two years has done nothing but create uncertainty in the rail industry, and there continues to be no clear path forward for such an arrangement . . . I believe it is time for all parties to move on from hypothetical merger proposals and focus on improving the transportation of goods and products to help grow the American economy.”

NS Offers Opening on CP Merger Talks

As expected, Canadian Pacific has filed with the U.S. Securities and Exchange Commission a shareholder resolution to be voted upon at the annual meeting of Norfolk Southern on May 12 that directs the NS board of directors to conduct “good faith discussions” about a merger.

The Calgary-based CP intends to send letters to NS shareholders to outline the value of the proposed merger.

NS told the SEC in a proxy that it believes the CP-sponsored resolution is unnecessary because the NS board would be willing to discuss a merger with CP if the Canadian carrier obtains a declaratory order from the Surface Transportation Board and is willing to increase its offer.

CP has made three offers to acquire NS stock, but the NS board has rejected all three proposals.

The NS proxy filing signaling a willingness to discuss a merger was greeted warmly by CP.

“CP has consistently stated that we are open to discussing all terms of a potential deal, including price, but we can’t negotiate with ourselves,” said CP Chief Executive Officer E. Hunter Harrison in a news release. “Given we have also asked the Surface Transportation Board for a declaratory order on the voting trust model we were pleased to hear that Norfolk Southern may now be willing to engage in direct face-to-face discussions.”

In its statement of opposition, the NS board wrote that:

• It is open to all feasible alternatives to drive shareholder value.

• It has confidence in NS’ strategic plan, which aims to boost revenue and cut costs to reduce the railroad’s operating ratio to 65 percent by 2020.
• It has clearly communicated its concerns regarding CP’s acquisition proposals.
• CP has not addressed the board’s concerns regarding the value of its three merger offers or the regulatory risks of a merger.

It is unclear if the STB will issue before the NS annual meeting a ruling on the CP voting trust even though CP asked for one by May 6.

STB spokesman Dennis Watson said he couldn’t say when the board might rule.

Watson said the STB could issue a decision based on initial evidence or might begin a proceeding to ask the parties to submit additional evidence.

The latter would likely move a ruling by the board to date after the NS annual meeting.

“We have not heard anything from the STB on timing, and we are proceeding with our shareholder resolution,” said CP spokesman Martin Cej.

Although voting trusts are commonly used to insulate companies from unlawful control during a merger review process, CP has proposed an arrangement that the STB has never ruled upon.

CP proposed putting itself and not the company it wishes to acquire, into a trust. Harrison and other CP executives would sever their positions with CP and, presumably, take over as managers of NS.

Earlier, the STB set a deadline of April 8 for interested parties to file statements and participate in the declaratory order process.

NS Sets Annual Meeting for May 12

Norfolk Southern has set May 12 as the date for its annual meeting during which Canadian Pacific interests are expected to ask NS stockholders to vote on a resolution mandating merger discussions with CP.

The resolution would direct NS management to meet with CP management to discuss a merger. NS management is opposing the resolution.

In a letter sent to NS employees, CEO James Squires said he will discuss during the meeting the progress the company has made in its five-year strategic plan to streamline operations and increase profit.

Squires said NS stockholders might receive proxy materials from CP pertaining to the resolution it has proposed to direct NS to talk merger with CP.

Support to STB in Favor of CP-NS Merger is Mostly Form Letters from Small Canadian Shippers

A survey conducted by Stephens, Inc., has found that 70 percent of shippers are opposed to any merger of Class 1 railroads in North America.

Those findings by the Little Rock, Arkansas, company are similar to the results of a survey conducted last year by investment banking and research firm Cowen & Company that found 71 percent of shippers oppose a merger of Canadian Pacific and Norfolk Southern.

Those findings fly in the face of assertions by CP that its proposed takeover of NS enjoyed widespread shipper support.

An analysis by Trains magazine of letters written to the U.S. Surface Transportation Board found that most of the letters in support of the merger appear to be form letters that were written by small Canadian shippers.

Although the letters contained some variations, in many instances the letters are identical with the only change being the name of the shipper.

In at least two cases, the shipper failed to change the basic form of the letter and included the wording “Our ORGANIZATION/COMPANY” in the letter that it sent to the STB.

The Trains analysis said that of the 65 letters that the STB has posted on its website, 65 support the merger while 57 are against it.

Notable opponents of the merger include major shippers and trade groups. More than half of the shippers who wrote to support the merger are based in Canada.

The findings of the Trains analysis belie comments made by a CP spokesman in response to the findings of the Arkansas company about widespread shipper opposition to a merger.

“I cannot comment on someone else’s survey, but I can tell you that letters posted to the STB website from shippers in favor of the transaction outnumber shippers opposing the combination by three to one,” said Martin Cej.
CP said it has received letters from 80 shippers in support of the transaction.

Among those who have written in opposition to the merger are the Automakers Alliance, UPS, FedEx and Consol Energy.

Public officials who have written to the STB are united in their opposition and most short line railroad that have written are likewise opposed.

The STB has received four letters of opposition from four labor unions and from 52 groups that include port authorities and economic development officials.

Common concerns expressed by opponents include pricing, service quality and further consolidation of the railroad industry.

Although they have expressed public opposition to further mergers, none of the other Class 1 railroads have written to the STB in regards to the proposed CP-NS merger.

STB Sets Dates for Filings in CP Case

The U.S. Surface Transportation Board has set two dates in April for responses in Canadian Pacific’s request for a declaratory order pertaining to its proposed voting trust that would govern the railroad as it pursues a merger with Norfolk Southern.

The STB gave interested parties a deadline of April 8 to respond to the CP petition. CP will then have until April 13 to respond.

CP on March 2 had asked the STB to issue a decision by May 6, which would presumably be before the annual meeting of NS shareholders.

The Calgary-based railroad has said that it plans to place itself and its subsidiaries into an independent, irrevocable voting trust during the time that the STB would review its merger with NS.

Concurrent with that, CP CEO E. Hunter Harrison would sever all of his ties with CP and assume the position of CEO of NS.

The STB order setting the April deadlines for comment on the CP request for a declaratory order noted that various parties, including railroad labor unions and CSX, asked the board to allow 30 to 45 days for comment on CP’s request.

CSX also had asked that CP’s bid for a declaratory order be denied outright.

CP tells SEC About Plans for Resolution to be Presented at Annual NS Shareholders’ Meeting

Canadian Pacific has told the U.S. Securities and Exchange Commission about its plans to ask Norfolk Southern shareholders to instruct the NS board of directors to “promptly engage in good faith discussions with CP regarding a business combination.”

In its filing, CP  justified its desire for the merger with NS by saying it would create an integrated transcontinental railroad with the scale and reach to deliver unsurpassed levels of safety and service to the customers and communities of both companies.

E. Hunter Harrison

CP contends that some NS shareholders have expressed support for the merger since it was proposed last year and the resolution is an opportunity for those shareholders to be heard by the NS board.

The NS board has rebuffed three offers from CP to acquire NS stock.

“We are not asking NS shareholders to vote on the business proposal itself, but to vote in favor of the shareholder resolution calling for NS to engage in good faith discussions with CP regarding a potential combination,” said CP head E. Hunter Harrison.

NS has indicated a conditional willingness to talk with CP, but said it would only do so after CP addresses some concerns by the NS board about whether a proposed voting trust for CP would receive the approval of the U.S. Surface Transportation Board.

CP has since asked the STB to issue a declaratory order pertaining to the trust, which would remain in effect during the time that a CP-NS merger undergoes regulatory review. NS also has called on CP to increase the value of the acquisition.

“CP is seeking a declaratory order from the Surface Transportation Board and we have consistently indicated that we are open to discussing the terms of our previous offers,” Harrison said. “With a vote ‘for’ the shareholder resolution, we hope to get NS to the table to discuss all the elements of the proposed business combination in an open and constructive manner.”

NS has yet to set a date for its annual shareholders’ meeting.

In the meantime, Harrison said he wants to meet with shippers who have expressed public opposition to the merger after package delivery giant FedEx became the latest shipper to come out against the combination.

“My friends at Federal Express that I grew up with in Memphis, I don’t know where they gained all this knowledge on railroads,” Harrison told the Business News Network of Canada. “I was a little disappointed. I don’t mind people objecting to transactions but let’s discuss it first. There was no discussion and I would imagine someone asked them to object.”

FedEx has written a letter to the STB to express “significant concerns” about the proposed merger, including higher shipping costs, fewer services and “such an erosion of competition [that] would ultimately adversely impact the American consumer and our still somewhat fragile economy.”

Business News reported that Harrison believes “there is a strong possibility” that a deal will be made within a year.