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December 16, 2015 11:00 AM, EST

Canadian Pacific Enhances Offer to Purchase Norfolk Southern

Canadian Pacific
Canadian Pacific Railway Ltd. enhanced its offer to acquire Norfolk Southern Corp. by at least 10% and signaled a proxy fight for the U.S. carrier would start in February if there are no talks beforehand.

The Canadian carrier, which is pressing its plan despite Norfolk Southern’s opposition, added an option called a contingent value right worth at least $3.4 billion, with the price tied to future price of Canadian Pacific stock. The previous offer, based on the current value of the companies’ shares, was about $28 billion, including $32.86 in cash and 0.451 shares of Canadian Pacific that would be exchanged for each Norfolk Southern share.

Norfolk Southern in response said its directors “will carefully consider” the revised proposal, while also noting that the latest CP plan “did not address the substantial regulatory risks and uncertainties inherent in the proposed combination.”

Norfolk contends its own plan to improve its operating ratio by five percentage points to 65 within four years is a better option for shareholders, given its expectations CP’s approach won’t be approved by the STB.

CP Board member William Ackman, who led a successful proxy fight to oust CP’s former management, said CP by Feb. 14 could either seek NS shareholder approval of a resolution directing NS to negotiate about a deal, or CP could put up a slate of new directors to run NS after the U.S. company’s annual meeting in May.

Combining the two companies would result in a $17.6 billion carrier with 44,000 workers.

“If this is going to be a street fight, so be it,” said Canadian Pacific CEO Hunter Harrison, who would move to head Norfolk as early as May under the Canadians’ proposal. After cost-cutting since his arrival in 2012, Harrison’s railroad in the third quarter had an operating ratio of 59.8. That was a 22.7-percentage-point improvement over three years.

“The clock is ticking and it is ticking down,” he said. “It is time for action.

“I have not given up on the ability to sit down with the NS folks,” he added.

Harrison, who spoke on a conference call, wouldn’t move to Norfolk unless and until the STB approves a voting trust for CP while the agency mulls whether to approve the actual merger. Norfolk Southern, citing comments from former STB Commissioners, insists that a voting trust won’t be approved. On Dec. 16, CP maintained that 144 voting trusts have been approved by the STB over two decades, while none have been rejected by the agency.

Norfolk also said CP should ask STB to rule in advance on whether the potential buyer’s voting trust structure would be approved by the agency. CP has said it has no plans to take that approach.

Ackman attacked NS, saying the company’s management has misled the public about the viability of a voting trust and the transaction in general.