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By Jeff Stagl, Managing Editor
Right before Christmas, Norfolk Southern Corp. rejected Canadian Pacific’s third buyout offer. So as 2016 dawned, observers were trying to determine whether the takeover-bid approach had reached the three-strikes-and-you’re-out point while CP was pondering the possibility of acquiring NS via other means.
The Canadian Class I had spent the better part of December in hot pursuit of a buyout deal after NS rejected its first offer. CP made a second offer on Dec. 8 and third offer on Dec. 16, which, in addition to cash and stock in the new combined company, proposed a 0.451 contingent value right per share. But both proposals ultimately were rebuffed.
NS leaders characterized each proposal as “grossly inadequate” in press releases issued in response to the offers.
The buyout bids “create substantial regulatory risks and uncertainties that are highly unlikely to be overcome” if the Surface Transportation Board (STB) reviews a proposed merger, and overall are “not in the best interest of the company and its shareholders,” NS leaders concluded.
In a Dec. 23 letter to CP Chief Executive Officer E. Hunter Harrison and Chairman Andrew Reardon, they also called out Harrison for publicly stating that NS’ board isn’t engaging with CP’s top executives to broker a deal.
“There is no basis to meet until you ... make a compelling offer and address the regulatory issues, which you have the ability to do by seeking a declaratory order,“ NS leaders wrote.
It’s apparent that neither NS’ top leadership nor its board are willing to hold an “open and constructive dialogue” about a merger, and that the board’s interests aren’t aligned with shareholders’ best interests, CP leaders said in a press release issued Dec. 23. Therefore, CP plans to “review its strategic alternatives.”
Harrison believes the proposed merger would pass STB muster. During a call with analysts on Dec. 16, he noted that BNSF Railway Co.’s stated interest in the potential combination was an indication that regulatory approval is possible.
BNSF Executive Chairman Matt Rose last month said his railroad is open to making a competing bid for NS or exploring a merger with another Class I.
“If this can’t be approved, why would [BNSF] care?” Harrison said.
During the call, Harrison also expressed disappointment that the tone of the takeover attempt had devolved into a “street fight.” However, it might take a fight of sorts for CP to pull off a takeover.
It’s highly unlikely CP will increase its buyout bid, said Lee Klaskow, a senior analyst for freight transportation and logistics at Bloomberg Intelligence, in a video posted online Dec. 23.
“I think it definitely will come down to a proxy fight,” he said. “And it might even push NS into the arms of another acquirer.”
A proxy battle, in turn, could compel BNSF to “throw its hat into the ring” with an upfront cash premium for NS, Cowen and Co. analysts said in a Dec. 28 report.
Or, CP could again target CSX Corp. instead, according to a Jacksonville Business Journal report. In late 2014, CSX spurned CP’s merger proposal.
Meanwhile, CP’s continued attempts to acquire NS are negatively pressuring its credit ratings, according to a Moody’s Investors Service report issued Dec. 21.
“The proposed combination markedly increases risk to creditors, from increased leverage in an industry that requires ongoing heavy capital spending compounded by operational challenges that are likely during the very lengthy integration phase of the transaction,” the report stated.