No guarantee merged railway’s HQ will be in Canada: CP boss
MONTREAL North America’s largest railway may not be headquartered in Canada in the event of a merger between Canadian Pacific and Norfolk Southern, CP Rail chief executive Hunter Harrison said Thursday.
The veteran American railroader told an industry conference webcast from Florida that details such as the headquarters location, distribution of board seats and which jobs are protected would have to be worked out during negotiations.
“To get there we have to talk,” he told the UBS Industrials and Transportation Conference.
Harrison and his Norfolk counterpart got together for just one meeting lasting over two hours last week to discuss the Calgary-based railway’s offer. The bid, valued at about US$28 billion, was detailed publicly Wednesday.
CP has presented a 50-50 stockand-cash offer that would give U.S.-based Norfolk Southern shareholders US$46.72 in cash and 0.348 of a share in the new merged company for each share they hold.
That would see Norfolk Southern shareholders own a 41 per cent stake in the combined company, which would be listed on both the New York and Toronto Stock Exchanges.
Norfolk Southern gave a cool initial response to the takeover proposal, describing it as an “unsolicited, low-premium, non-binding, highly conditional indication of interest.”
Analysts have described CP Rail’s offer as a “starting point.”
Harrison said he believes all the potential concerns of Norfolk, including price, can be resolved.
“If you can sit down and have a dialogue we think that we can maybe solve most or all of those issues that they seem to be concerned about,” he said.
Harrison said it was hard to set a price for an offer when Norfolk didn’t indicate what it would consider acceptable.
“Is that our final offer, line in the sand? No. And I tried to indicate that to them,” he said.
Harrison said he’s not aware of any non-financial issues that could be an impediment to getting a friendly deal done and believes regulatory and shipper concerns can be addressed within the twoyear timeline it has set.
CP has taken a proactive approach to addressing potential concerns by proposing to give shippers the option to connect with another railway at terminals and gateways if the merged company fails to provide adequate service or competitive rates.
CP has also said the merger would alleviate congestion in Chicago by using underutilized hubs that would free up capacity for other railways operating through the city without the need for more infrastructure.
While he would prefer not to launch a hostile battle, Harrison said he wants to take the proposal to shareholders to explain how it can deliver value. Harrison said CP Rail has experience driving efficiency and believes Norfolk’s operating ratio can be cut about 10 percentage points to around CP’s 60 per cent level.
Much of the US$1.8 billion cost savings can be realized by running longer trains and reducing the number of locomotives, car fleet, rail yards and staffing, he added.
Harrison says the merger could involve various structures, including voting trusts and a holding company headed by Harrison, with CP chief operating officer Keith Creel and Norfolk Southern CEO Jim Squires running either of the railways.
Meanwhile, analysts say CP’s debt load would surge to more than double the industry average if it succeeds with its bid, a heavy burden even with the combined company’s increased earnings power.
CP, already the most indebted railroad among its North American peers, said leverage would rise to four times earnings after the deal. That’s up from 2.4 currently and would be well above the 1.9 average of Canadian Pacific and its five railroad rivals, according to data compiled by Bloomberg. The company has said it’s committed to reducing that to 2.5 times leverage within 2-1/2 half years.
“Even if you look at the combined entity, the increase in debt is significant,” said Rene Lipsch, the Moody’s analyst who rates Canadian Pacific. Moody’s Investors Service rates Canadian Pacific investment grade at Baa1 with a stable outlook.