Canadian Pacific Reveals Details of Offer for Norfolk Southern

November 18, 2015 by Paul Ausick

Canada-based railroad operator Canadian Pacific Railway Ltd. (NYSE: CP) released details Wednesday morning of a hostile takeover offer for U.S.-based railroad operator Norfolk Southern Corp. (NYSE: NSC). The offer is worth about $28.4 billion, and as of Tuesday evening, Norfolk Southern is not impressed.

In its announcement Wednesday morning, Canadian Pacific proposed a 50% cash, 50% stock transaction based on last Friday’s closing stock price in which Norfolk Southern shareholders would receive $46.72 in cash and 0.348 shares of stock in a new company that would own both railroads. Canadian Pacific’s CEO, Hunter Harrison, said in a letter to Norfolk Southern CEO James Squires, that the offer represents a “substantial initial 23.0% premium to [Norfolk Southern’s] 45-day [volume-weighted average price] of $79.14.” Norfolk Southern shareholders would own 41% of the new company.

A little history might help here. In 2011, Bill Ackman’s Pershing Square Capital Management acquired a stake of more than 11% in Canadian Pacific, and by spring of the next year the railroad had a new board and was on the way to hiring Harrison, recently retired as CEO of Canadian National Railway Co. (NYSE: CNI), as its new CEO. Harrison was, and still is, a highly regarded railroad executive who led an explosion in Canadian Pacific’s share price from around $45 a share to a high of around $220 in September of last year. The shares trade at around $140 currently, largely the result of lower crude oil and coal shipments.

Harrison approached CSX Corp. (NYSE: CSX) about a merger last year, but that offer was rebuffed. Any deal between Canadian Pacific and Norfolk Southern would have to pass muster by both U.S. and Canadian regulators, and Norfolk CEO Squires has reportedly told Harrison that the regulatory hurdles are too high to be cleared.

Squires may be right. A proposed 1999 merger between Canadian National and Berkshire Hathaway-owned BNSF was squashed by U.S. regulators in 2000.

In any event, Norfolk Southern has rejected Canadian Pacific’s offer, calling it “unsolicited, low-premium, non-binding and highly conditional.”

Norfolk Southern investors appear to think a better offer may be in the works because the stock traded up nearly 6% Wednesday morning, at $91.98 in a 52-week range of $72.10 to $117.64.

Canadian Pacific’s shares were inactive, having closed at $138.58 on Tuesday, in a 52-week range of $129.83 to $209.98.

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