Deal or no deal? CP offers to buy NS

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Two Canadian Pacific trains, with a variety of locomotives, meet near Oconomowoc, Wis., in November 2014.
Brian Schmidt
NORFOLK, Va. — Canadian Pacific today officially proposed to purchase Norfolk Southern, saying the combination would create a transcontinental rail system that would both improve service and enhance competition.

CP says its proposal, sent in a letter to NS today, included a “sizeable premium in cash and stock offered to NS shareholders.” NS disagreed with CP’s assessment of the purchase offer, saying it received “an unsolicited, low-premium...and highly conditional indication of interest from Canadian Pacific.”

NS said CP is offering $46.72 in cash and would swap 0.348 CP shares per NS share, which represents a premium of less than 10 percent based on today’s closing share prices. CP would not provide specifics on the offer because the NS board was still considering the proposal, CP spokesman Martin Cej said.

NS CEO James Squires was cool to a merger proposal when he met with CP CEO E. Hunter Harrison in Norfolk on Friday, according to published reports. NS was highly critical of CP’s proposed merger with CSX Transportation last year and insiders say NS has not changed its tune.

“CP strongly believes that the combined railroad would offer unparalleled customer service and competitive rates that will support the success of the shippers and industries it serves, and satisfy the U.S. Surface Transportation Board and Canadian regulators,” CP says in a statement announcing the purchase offer.

Significantly, CP’s proposal aims to win over shippers. CP says it would offer a limited form of open access “that would change the status quo in U.S. rail transportation.” In the event the combined CP-NS company failed to provide adequate service or rates, it would permit a competitor to operate into its terminals. CP also says the combination would eliminate so-called bottleneck pricing by allowing shippers the choice of where to connect with another railroad along the combined CP-NS system.

Captive shippers have been seeking some form of open access and reciprocal switching agreements for years. Railroads have been resistant. Last year, the Association of American Railroads said that reciprocal switching would reduce rates for a few shippers at expense of the majority of rail customers while hurting the quality of service as well as operational efficiency.

Anthony Hatch, an independent rail analyst, was not surprised by CP’s offer.

“This makes official what we knew was being discussed and puts pressure on NS management,” he says. “But doesn’t change their minds — yet, anyway. The access provision is interesting, and proactive, but won’t be popular with the other railroads.”

The proposal itself won’t be popular with the other Class Is. On Monday, CSX and Union Pacific both told Trains News Wire that they were opposed to additional consolidation in the industry. CSX and UP both say that consolidations are not necessary, would face significant regulatory hurdles, and create service problems. BNSF Railway and Canadian National management have also said that railroad consolidations would face an uphill battle to receive regulatory approval.

The NS board of directors has a responsibility to consider CP’s offer. If it accepts the offer, the companies would move forward with a merger agreement. If NS rejects it — as most observers believe it will do, at least initially — then things may get interesting. CP could sweeten its offer to NS. Or it could take its case straight to shareholders, which would ratchet up the pressure on NS management.

“CP hopes the NS executive leadership team and the Board of Directors give this offer due consideration, and looks forward to a thoughtful dialogue on creating a new industry leader,” CP says in a statement.

In response, NS says it would “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 shareholder value through strategic, financial, and operational measures that pursue the best interests of the company and its stockholders.”

Earlier in the day, CP President and COO Keith Creel spoke at the Scotiabank Transportation and Aerospace Conference and declined to comment on rumors that the two companies would merge.

But Creel did say that any railroad merger would have to involve two friendly partners. Creel spoke in general terms about CP’s contention that the industry needs to consolidate in order to further improve service, increase capacity, and get traffic away from Chicago’s congestion.

“We think eventually, it’s going to happen,” Creel says of Class I consolidations.

CP is taking the lead in promoting consolidation because it’s the right thing to do, Creel says, and because the railway’s service model and lower costs help shippers win in their end markets. “That’s compelling,” he says.

Creel says that the merger process will not be easy but that regulatory hurdles can be overcome.
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