December 8, 2015 10:45 AM, EST

Canadian Pacific Revises Merger Offer; Norfolk Southern Rejects It Again

Canadian Pacific Railway revised its $28 billion offer to buy Norfolk Southern, offering the U.S. railway’s shareholders a greater percentage of ownership and vowing to reduce their risk of losing money due to regulatory review, but the acquisition proposal once again was rejected.

The Canadian railroad said its plan was more attractive because Norfolk shareholders would receive their cash and stock next year, instead of waiting for a Surface Transportation Board ruling on the proposal in 2017 at the earliest. Under the plan, Canadian Pacific CEO Hunter Harrison would move from that carrier to take that post at Norfolk Southern. The components of the offer changed from $46.72 in cash and 0.348 shares to $32.86 in cash and 0.451 shares of CP. The present dollar value of the revised offer, based on current share prices, is $91.71, about 30 cents less than the previous proposal.

The battle, which is the first rail merger scrap since 1999, matters to trucking because the two railroads combined hauled $3.82 billion in truck-rail freight last year, which is more business than all but seven companies in the Transport Topics Top 100 list of the largest U.S. and Canadian for-hire carriers.

“This is all about creating shareholder value,” Harrison said on a conference call, where company officials highlighted the Canadian carrier’s target of $1.8 billion in financial benefits, including fuel and other operational savings at the U.S. carrier. Norfolk Southern's financial performance measured by operating ratio is the worst among major North American railroads.

The Dec. 8 rejection from Norfolk Southern termed the revised offer “is not only less than what the Norfolk Southern board has already found to be grossly inadequate, it is even more uncertain and risky given the decrease in the cash consideration.” Four days ago, Norfolk rejected the initial plan, arguing also that there was no chance STB would approve such a deal.

Canadian Pacific would go into a voting trust, which that company said will speed the review process.

Harrison would not indicate what Canadian Pacific’s next steps might be, saying "Our interest right now is to try and engage in a dialogue" with Norfolk.

CP shareholder and board member William Ackman, who brought in Harrison to run Canadian Pacific three years ago, said the projected value of the two companies after a combination would be at least 30% more than current prices if the voting trust and Harrison’s shift to Norfolk Southern came through.

The Canadian Pacific presentation also compared Harrison’s track record in improving shareholder value and financial performance at three railroads during his five-decade career with Norfolk Southern CEO James Squires, who has been in that post for less than six months and came to that job with no rail operating experience. Squires’ 23-year NS career has been in law and administration until he became CEO.