Canadian Pacific to Shift Strategy in Bid for Norfolk Southern

Canadian Pacific CEO Hunter Harrison

Canadian Pacific Railway Ltd., concerned that mounting political pressure may scuttle its proposed stock-and-cash bid for Norfolk Southern Corp., plans to change strategy to sway lawmakers and reverse the momentum.

“When you’re playing the game and somebody changes the rules on you, you have to review your strategies,” Canadian Pacific CEO Hunter Harrison said Jan. 21 on a conference call. “If this is a political contest and we’re going to forget about the process that was designed, and we’re going to let the legislative branch take over, the rules are all changed.”

Federal and state lawmakers, shippers and railroad operators have taken up Norfolk Southern’s cause by writing letters to the U.S. Surface Transportation Board in opposition to any proposed deal — even though a formal evaluation process hasn’t even begun. In response, Canadian Pacific has hired public-relations company Edelman for help and asked the U.S. Justice Department to look into a “collective campaign” against the bid.

“There’s a lot of moving parts going on here,” Harrison said. “There are some things that have happened, and almost happen daily, that we certainly did not anticipate.”

He declined to provide more details on his strategy. “I would say that when you try to anticipate what we might do, you are probably going to get ahead of us a little bit,” he said.

Harrison has teamed with activist investor Bill Ackman, whose Pershing Square Capital Management owns the largest stake in Canadian Pacific, to push Norfolk Southern shareholders to support the takeover. A deal would create a coast-to-coast railroad that eliminates railcar exchanges between the railroads and would enable Harrison to apply his efficiency expertise to Norfolk Southern, which lags other large carriers in key service measures.

The men have brought up the possibility of a proxy battle to win board support for the combination.

The letters of opposition posted on the STB's website mirror the general view of the industry, said Lance Fritz, CEO of Union Pacific Corp., the largest publicly traded railroad in North America. Most shippers oppose industry consolidation, he said.

“My review of those documents is that there’s just overwhelming negative sentiment.” Fritz said. “It reflects what we’ve heard.”

Union Pacific has come out publicly against the merger on the grounds that it would hurt service and rail investment. The railroad has discussed its opposition with government officials and others in the industry, which is within its rights, Fritz said.

As a result of the opposition, Canadian Pacific’s initial timeline to complete a deal for Norfolk Southern by October 2017 is in jeopardy, Harrison said.

“There’s no doubt there’s a delay that’s going to kick in here,” Harrison said. He didn’t provide specifics.

Norfolk Southern’s board already has rejected proposals from Canadian Pacific — including one in mid-December that valued the target at about $27 billion.

Should Canadian Pacific end its pursuit of Norfolk Southern, options may include an "aggressive” stock buyback plan, Harrison also said.

”That’s worked well for us” in the past, he said. ”Life goes on.”