Norfolk Southern Again Rejects Canadian Pacific Acquisition Offer

Luke Sharrett/Bloomberg News

Norfolk Southern Corp. for the third time rejected an acquisition offer from Canadian Pacific Railway Ltd., saying the latest proposal also was ” grossly inadequate” and “creates substantial regulatory risks and uncertainties that are highly unlikely to be overcome.”

The Virginia-based company’s statement came one week after the Canadian carrier enhanced its offer with a financial tool known as a contingent value right to add as much as $3.4 billion to its earlier offer worth $27.4 billion.

The Canadian company, which believes it can lower Norfolk’s costs and boost its profits by installing new management, didn’t make an immediate response to the latest rejection. Its leadership has promised to start a proxy fight as early as February to either force NS to negotiate or oust its current directors to advance the acquisition.

“It would be inconsistent with the duties of the board to pursue a risky and uncertain offer that substantially undervalues the company,” said the NS letter to Canadian Pacific CEO Hunter Harrison and board Chairman Andrew Reardon.

Canadian Pacific’s other offer components were $32.86 in cash and .451 CP share for each Norfolk share. In total, analysts estimated the Canadian Pacific offer at its current value at around $100 per share. Norfolk’s stock has traded as high as $112 in the past 12 months but has been around $90 in recent weeks.

The Canadian railroad has targeted $1.8 billion in savings, with lower operating costs and tax savings. CP most recently had an operating ratio of 59.8, 10 percentage points better than NS.

Norfolk in its earlier comments has rebuffed the Canadian offers, saying that the U.S. company has its own plan to lower operating costs and boost profits.

Norfolk attacked other features of Canadian Pacific’s proposal, including its plan to put CP in a voting trust and shift Harrison to the CEO’s chair at NS, and disputed the Canadian carrier’s push for face-to-face talks.

“There is no basis to meet until you both make a compelling offer and address the regulatory issues, which you have the ability to do by seeking a declaratory order,” the NS letter from CEO James Squires and lead independent director Stephen Lear said. "We also note your repeated public statements that you are not willing to increase your offer regardless of whether we were to meet.”

“We do not believe that your voting trust structure would be approved,” Squires and Lear said. “You have a path to seek a declaratory order from the STB as to whether the voting trust structure that you proposed could work. Your decision not to seek an order shows a lack of confidence in your proposed structure.”

The Canadian carrier has said the STB declaratory order process isn’t needed because there is a pattern of the agency’s approval of voting trusts such as the one CP is planning to create.

Norfolk also announced cutbacks in coal operations, including the shutdown of a loading facility in Ashtabula, Ohio, and consolidation of thermal coal shipments from Ohio, West Virginia and Maryland at a dock in Sandusky, Ohio. The Ashbtabula move is a response to coal business that has fallen off for Norfolk and competitor CSX Corp. as a result of low natural-gas prices and other factors. NS coal revenue in three quarters of this year is down nearly 25%.

The coal pier changes are affecting 34 jobs in Norfolk’s workforce, or about one-tenth of 1 percent of its total workforce. Capital and operating costs also will be reduced, but the statement didn’t say by how much.