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.

CP Seeking STB Review of Trust Proposal

Canadian Pacific continues to turn up the heat in its pursuit of Norfolk Southern, this time by asking the U.S. Surface Transportation Board to issue an expedited declaratory review and order of its proposed voting trust.

CP said it expects the STB to confirm the viability of a voting trust structure whereby CP would be placed in trust during the regulatory review of the merger proposal.

The Calgary-based CP asked for a decision by May 6, presumably ahead of the annual meeting of NS shareholders.

“Shareholders of both CP and NS have asked 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 and we have listened to the owners of our respective companies,” said CP CEO E. Hunter Harrison. “Since we remain convinced that productive discussions about the potential structure and value of a formal bid must take place face to face we hope this show of good faith is met with an equal demonstration on the part of NS.”

At the NS shareholders’ meeting, interests representing CP will submit for a vote a non-binding resolution directing NS management to discuss a merger with CP.

The NS board of directors has rejected three offers from CP to acquire NS stock. Harrison has proposed severing all of his relationships with CP and becoming CEO of NS while the merger is reviewed.

CP’s filing with the STB indicated that Harrison might bring some current CP managers with him to NS.

Analysts say that although an STB declaratory order would review a hypothetical proposed trust—outside the established STB procedure for seeking formal trust approval—CP is hoping that the board’s ruling will offer enough clarity for NS shareholders “to make an informed decision on CP’s pending resolution.”

Harrison said that voting trusts have been used in hundreds of transactions involving regulated industries, including 144 transactions since deregulation of the rail industry in 1980.

“Trusts, besides protecting against unlawful control violations, are a key means of reducing the risk that the regulatory approval process will either interfere with the marketplace’s assessment of a merger or be used as a tool by management to fend off would be acquirers,” he said.

STB rules allow the board to respond to a petition within 20 days, but the board also could order an extension of another 20 days.

Railway Age reported that neither the STB or the Interstate Commerce Commission has ever approved a voting trust arrangement whereby the acquiring railroad is placed in trust rather than the railroad being acquired.

Nor has there been a situation in which the CEO of the acquiring railroad left to become the head of the railroad being acquired.

NS attorneys might call this a contrivance intended to circumvent the law.

CP has argued that its trust structure would protect NS stockholders and allow Harrison to implement precision scheduling railroading at NS, which he has said would make NS more efficient and more valuable.

“If the transaction ultimately were not approved there would be no plan or expectation that any of us would leave NS to rejoin CP,” Harrison wrote to the STB. “In fact, I plan to remain at NS until it has become an industry leader and can sustain that position before giving retirement a second chance.”

Harrison Also Approached CSX About Merger

Even as he was trying to take over Norfolk Southern, Canadian Pacific CEO E. Hunter Harrison was making overtures to CSX.

The Wall Street Journal reported this week that Harrison approached CSX in January about a merger, but was rebuffed.

CP had sought to merger with CSX in late 2014 and was turned down then, too.

Harrison told the newspaper that he remains committed to making a deal to acquire NS and merge it with CP. His reaching out to CSX was simply a matter of exploring the various options available.

“We’ve said all along that if we looked at the synergies between the two eastern carriers right now both of them would work for us,” Harrison said.

A CP spokesperson confirmed the accuracy of the WSJ report while a CSX spokeswoman said the railroad “does not comment on merger speculation.”

Thus far, NS has rejected three offers that CP has made to buy its stock.

NS Board Opposes CP Resolution, Outlines Conditions Under Which it Will Talk Merger

The Norfolk Southern board of directors has recommended that company shareholders reject a resolution to be offered at the annual meeting to direct NS management to discuss a merger with Canadian Pacific.

In a filing with the U.S. Securities and Exchange Commission, NS also laid out a limited set of circumstances under which it would be willing to discuss a merger with CP.

CP interests intend to introduce the non-binding resolution in an effort to jump-start merger talks that have faltered after the NS board rejected three offers from CP to buy NS stock.

NS has not announced a date for its annual meeting, but it usually is held in May.

“We believe that by rejecting the CP proposal, shareholders will send a clear message to CP that Norfolk Southern shareholders support greater value and regulatory certainty from CP,” the NS board of directors said in the SEC filing.

The statement also indicated that NS would consider talking with CP if it were to “state a willingness to meaningfully increase the consideration it is offering and were to receive a declaratory order from the Surface Transportation Board validating its proposed voting trust structure.”

CP has asked the STB to issue a declaratory order concerning its proposed voting trust that would be implemented during the time that a CP-NS merger was under regulatory review.

The STB has not said when it would rule on the declaratory order. The board might not act before the NS shareholders’ meeting. In the SEC filing, NS also asserted:

• It is open to all feasible alternatives to drive shareholder value.
• It has confidence in its strategic plan, which aims to boost revenue and cut costs while reducing 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 NS board’s concerns regarding the value of its three merger offers or the regulatory risks of a merger.

“In the event that CP addresses these concerns by receiving a declaratory order from the STB validating its proposed voting trust structure and indicates a willingness to meaningfully increase the value represented by its proposal, Norfolk Southern would be willing to enter into good faith discussions with CP regarding the potential combination of the two companies,” NS said.

CP Touts Letters Supporting Merger with NS

Canadian Pacific said it has received more than 80 letters of support from shippers who favor CP’s proposed merger with Norfolk Southern.

In a statement, CP claimed that the ratio of letters in support as opposed to opposing the merger is more than 3-1 in favor of the merger.

Sixty-two of the letters of support have been posted on the U.S. Surface Transportation Board website.

NS has rejected three overtures from CP to take control of NS by buying its stock.

In the meantime, the Transportation Trades Department of the AFL-CIO has expressed “grave concerns” that the proposed CP-NS merger might lead to a “final round of consolidation” in the railroad industry, which would result in “further reducing jobs, safety and service.”

The labor union said it remembers having lived through the “mega-mergers during the 1980s and 1990s that have left this country with only seven Class I freight railroads, transportation labor understands . . . the devastating impact these transactions can have on jobs, freight service and safety.”

TTD called on the STB, regulators and legislators “to use their review and oversight authorities to carefully monitor CP’s actions and reject merger schemes that harm the economy and the public interest.”

New CP Website Touts Benefits of Merging With NS; UPS Comes Out Against it in Letter to STB

Now there’s a website designed to drum up support for the proposed consolidation of Canadian Pacific and Norfolk Southern.

CP on Thursday launched the site CPconsolidation.com to lay out the benefits of the merger, which NS has fiercely resisted.

It is the latest CP ploy to try to get the attention of NS stockholders, shippers and others. Earlier this week CP CEO E. Hunter Harrison and CP director Bill Ackman talked about offering a resolution at the annual meeting of NS shareholders that would direct the NS board of directors to talk with CP about a merger.

CP said its new website “highlights the benefits of its pro-customer, end-to-end, competition-enhancing business combination proposal with NS.”

The site also strikes a more conciliatory tone while downplaying the fact that CP has proposed a hostile takeover of NS.

“Together, CP and Norfolk Southern would make a transcontinental railroad with the scale and reach to deliver unsurpassed value to shareholders,” says the site’s introduction. “We invite NS leadership to sit down with CP to discuss the offer, and consider the full range of options — together.”

In the meantime, UPS has come out against CP taking over NS.

One of the continent’s largest intermodal shippers, UPS wrote to the U.S. Surface Transportation Board in opposition to the merger, which has yet to be formally proposed to regulators.

“UPS is concerned that this combination would lead to diminished rail intermodal service levels and increased costs for all segments of rail customers,” UPS said. “In addition, UPS is concerned about potential industry consolidation as a reaction to a NS-CP merger, which would only further negatively impact freight rail shippers.”

UPS noted in its letter, dated, Feb. 9, that it ships 3,000 trailers and containers by rail each business day.