Norfolk Southern Corp. offered a sharp rebuke to Canadian Pacific Railway Ltd.'s $28 billion takeover offer, saying that even at a sweetened price, a deal would be unlikely to gain regulatory approval.
Canadian Pacific's offer of $46.72 in cash and a 0.348 share of its own stock for each share of Norfolk Southern stock "is grossly inadequate" and creates "substantial regulatory risks and uncertainties that are highly unlikely to be overcome," Norfolk Southern said in a statement Friday.
"Canadian Pacific's short-term, cut-to-the-bone strategy could cause Norfolk Southern to lose substantial revenues," Chief Executive Officer James Squires said in the statement. "The proposed transaction risks harm to vital transportation infrastructure and the communities we serve."
Norfolk Southern announced a stepped-up effort to boost efficiency and cut costs, attempting to persuade shareholders that rejecting an offer from Canadian Pacific CEO Hunter Harrison-- who has increased profits at three railroads -- was in their best interest.
Squires also emphasized that the merger process could lead to more regulation, a concern expressed this week by Union Pacific Corp. and other railroads. The U.S. Surface Transportation Board tightened merger-approval rules after blocking a tie-up between BNSF Railway Co. and Canadian National Railway Co. in 2000, saying that previous large deals hurt service to shippers. Since then, railroads haven't proposed a tie-up under the new process, which could take as long as 28 months, Norfolk said.
"At any price, the regulatory risks, including the likelihood to close, remain the same," Squires said on a conference call. He declined to comment on the possibility that Canadian Pacific would increase its bid.
Norfolk Southern executives "haven't talked to a single customer that supports the idea" of combination with Canadian Pacific, Squires said in an interview. "In fact, our customers' responses range from highly skeptical to vehemently opposed." Discussions with shareholders also "helped inform our board's decision."
Harrison had said that Canadian Pacific probably would need to increase its offer and that shippers had given him positive feedback on his plan to give customers more say on how their freight is handled by the combined railroad. Shareholders found a combination intriguing, with some even suggesting he explore a deal, he said.
Norfolk Southern dropped as much 7 percent, the most intraday since August. The stock fell 1.1 percent to close at $92.06 in trading Friday on the New York Stock Exchange. Canadian Pacific's offer indicated a value of $94.02, based on the Nov. 13 close. Canadian Pacific fell 3.1 percent to $135.99 in Toronto.
Norfolk Southern on Friday offered its own plan to juice its earnings and stock with cost cuts, price increases and revenue growth. The operating ratio, a measure of efficiency in which a lower number is better, will drop below 70 percent next year and 65 percent by 2020, the railroad said.
The merger proposal "failed every test in terms of valuation," Squires said. "We believe we have a tremendous strategic plan that will drive shareholder value to a far greater extent than this proposal ever could," he said.
Investors may be skeptical that Norfolk Southern, historically one of the least efficient of the large railroads, can improve operations in the way it's laid out, said Logan Purk, an analyst at Edward Jones & Co. Harrison has a proven track record of making three railroads more efficient, Purk said.
"The slides are pretty. The end result will get some nice earnings power and a higher valuation," he said. "Can they execute it? There's a pretty big gap between Point A and Point B," he said.
After exploratory talks with CSX Corp. last year failed, Harrison set his sights on Norfolk Southern in his campaign to create a transcontinental railroad. Harrison has said that a combination would ease congestion in the eastern U.S., where Norfolk Southern is the No. 2 operator, and offer customers more choices through such steps as opening up terminals to other railroads.
Squires offered to meet with Harrison and activist investor Bill Ackman, a Canadian Pacific shareholder, if they entered into a confidentiality agreement, but they refused, according to the Norfolk Southern statement. The regulatory process would be lengthy, Norfolk Southern said.
"Even in the unlikely event of approval, Norfolk Southern would be in limbo for this extended period, causing loss of momentum and disruption to our business and operations," the railroad said.
A representative for Canadian Pacific said the railroad is reviewing Norfolk Southern's response.
Norfolk Southern's investors had welcomed Canadian Pacific's overtures. Shares of the Norfolk, Virginia-based company surged 17 percent through Thursday from Nov. 6, the last trading day before Canadian Pacific's interest was reported. The Standard & Poor's 500 Index meanwhile had dropped 2.4 percent.
Since joining Canadian Pacific in 2012, Harrison has led a turnaround that transformed one of the industry's least- efficient operators into one of its leanest carriers. Norfolk Southern is at the bottom of the region's major carriers as measured by operating ratio, which compares revenue to expenses. That status should help sell a deal to investors, Harrison has said.
Business on 12/05/2015