Norfolk Southern Rejects $28.1 Billion CP Merger Offer

Luke Sharrett/Bloomberg News

Norfolk Southern Corp. soundly rejected Canadian Pacific Railway Ltd.’s $28 billion merger proposal, labeling the offer “grossly inadequate and not in the best interests of shareholders.”

The offer that combined $46.72 in cash and 0.348 shares of stock was made on Nov. 17, as the Canadian railway led by CEO Hunter Harrison tried to pull off the first rail industry combination since 1999.

The Virginia-based railroad said the proposal also created substantial regulatory risks and uncertainties that are highly unlikely to be overcome” and maintained that its strategy over the long term would deliver better service and higher profitability, pushing its operating ratio below 70 next year and below 65 in 2020.

Since taking over in 2012, Harrison’s management team has trimmed 22.7 percentage points off the Canadian carrier’s operating ratio, pushing it below 60. Norfolk’s operating ratio last quarter was 10 percentage points worse than Canadian Pacific.

“We believe in our ability to generate greater shareholder value through execution of our strategy — delivering efficient and superior service to build a more profitable franchise based on price and volume growth, implementing efficiency measures, and increasing returns on capital to strengthen our financial performance, all while maintaining our disciplined capital return strategy,” CEO James Squires said in a statement. “Norfolk Southern has made growth investments, and we expect to realize the benefits of these investments in the years ahead, especially as our intermodal volumes continue to build.”

Squires also said NS believes the Surface Transportation Board would reject a merger. In the face of widespread railroad opposition and post-merger service meltdowns in the 1990s, STB toughened its merger requirements and signaled that the 1999 proposal to mesh Canadian National Railway and BNSF Railway would go nowhere.

In addition to the assessment that the offer of about $96 share was too low, the U.S. carrier said CP’s move was “opportunistically timed” to take advantage of the current NS share price, which was $93.11 yesterday. Its shares have ranged from $72 to $112 over the past 12 months.

Harrison in recent days has said CP is prepared to increase its offer or take its bid before NS shareholders if the U.S. company rejected the proposal.

The NS also said CP’s “cut-to-the-bone” strategy would focus on cutting jobs and assets instead of long-term growth. Specifically, NS contended that the combination wouldn’t improve service in Chicago, the nation’s largest rail hub and shipping bottleneck. NS noted that the two railroads’ tracks don’t physically connect now in that city, which would add to congestion because transferring loads from one railroad to another would involve use of a third carrier.