ROUGH RIDE
CP says Norfolk Southern’s latest rebuff, refusal to talk could escalate things.
Norfolk Southern Corp.’ s board has officially rejected a revised takeover offer from Canadian Pacific Railway Ltd., saying it’s worth less than the first proposal and doesn’t do anything to address its regulatory concerns.
“The consideration in that proposal has less overall value and cash than your prior proposal, which the board had determined to be grossly inadequate,” says the rejection letter, signed by chief executive Jim Squires and lead independent director Steven Leer.
“Moreover, nothing in the revised, reduced proposal addresses the concerns of the Norfolk Southern board arising out of our extensive review of your prior proposal,” including the risk that it will be rejected by the U. S. Surface Transportation Board (STB), it adds.
The decision doesn’t come as a surprise, since NS put out a press release almost immediately after CP announced the new offer last week, calling it “even more uncertain and risky” than the first one.
But NS’s refusal to engage with CP increases the likelihood that the railway will take its offer directly to shareholders.
“They’re going to have to talk to us, or we’re going to have to take another tactic,” CP chief executive Hunter Harrison said in an interview on Bloomberg Television Monday.
A hostile bid is less likely to receive regulatory approval from the STB than a friendly one, said Scotiabank analyst Turan Quettawala.
“In our opinion, the more hostile the bid gets, the higher the risk for both NSC and CP shareholders, especially as management may be asked to make more concessions,” Quettawala wrote in a recent note to clients.
“The likelihood of a favourable result from the STB is also higher if the deal is friendly.”
Last week, CP offered NS shareholders US$ 32.86 in cash and 0.451 shares in the new company, compared to its original offer of US$ 46.72 in cash and 0.348 shares. According to CP, this will increase NS shareholders’ ownership of the combined company to 47 per cent from 41 per cent in the previous offer, giving them more potential upside.
It also offered to put CP in a voting trust while it waited for regulatory approval, allowing Harrison to move to NS and start running operations there.
CP estimates the value of the revised proposal to be US$125 to $140 per share, based on its assessment of how much the voting trust will be worth when it’s listed.
Even if the merger is ultimately rejected by the STB, Harrison argued that NS shareholders would still see significant upside.
NS has argued that it’s in the midst of executing its own turnaround plan, but that plan “offers little upside,” according to Raymond James analyst Steve Hansen.
“Conversely, both of the alternative paths under CP’s proposed voting trust plan — merger or no merger — point to compelling upside opportunity,” Hansen wrote.
It’s also possible that CP could revise its offer again, but only if NS shows a willingness to talk, Quettawala said.
“We think there is room to juice the offer more,” he wrote. “However, from a negotiation standpoint, it would be illogical to raise the price substantially unless there is a willing partner on the other side.”