CP and NS dig in on respective positions regarding a merger

Even though their respective positions on a large-scale merger remain unchanged, Class I railroad carriers Norfolk Southern and Canadian Pacific made their voices heard in regards to CP’s perseverance in wanting to acquire NS in what would represent a roughly $30 billion deal.

Since CP’s overtures to acquire NS went public last November, its rationale for wanting to acquire NS has been consistent in that it maintains bringing NS into the fold would create a true coast-to-coast railway that enhances competition and generates significant shareholder value. And now there is potentially an endgame, or, at least a target date in site, as it relates to possible next steps for the possibility of whether or not a marriage between CP and NS comes to fruition.

That came yesterday, with CP filing a definitive proxy statement in which it stated that it asked the NS board of directors to engage in good faith discussions with CP regarding a “business combination” or merger.

And from the NS camp, its board said in a proxy issued on Monday that it unanimously opposes the CP proposal, because CP has not addressed the NS board’s concerns regarding the value and certainty of its acquisition proposals.

It added that by rejecting the CP proposal shareholders will send a clear message to CP that Norfolk Southern shareholders support greater value and regulatory certainty from CP, while also saying that if CP were to state a willingness to meaningfully increase the consideration it is offering and were to receive a declaratory order from the Surface Transportation Board validating its proposed voting trust structure, then the Norfolk Southern Board would engage in good faith discussions regarding a potential business combination.

That development was viewed as a positive by CP CEO E. Hunter Harrison.

“CP has consistently stated that we are open to discussing all terms of a potential deal, including price, but we can’t negotiate with ourselves,” said Harrison in a statement. “Given we have also asked the Surface Transportation Board for a declaratory order on the voting trust model we were pleased to hear that Norfolk Southern may now be willing to engage in direct face-to-face discussions.”

But NS CEO James Squires wrote in a letter to employees that the NS board recommends that company shareholders vote against the CP proposal in advance of the company’s annual meeting on May 12.

Last December, CP’s Harrison made his case for the rationale for making this type of acquisition.

“The rail industry came out of 2014 with a substantial amount of criticism about the lack of infrastructure and being able to handle traffic throughout North America,” he said. “We address those concerns very seriously and took a look at enhancing infrastructure and doing some things differently, and we found we were met with opposition from local communities with s NIMBY (“not in my back yard”) mentality, so as a common carrier we don’t have a choice about hauling these goods. At the same time people are opposing consolidations or merger actions, so the question becomes what do we do in the future and in the east and with additional growth if infrastructure cannot be added? As we went through those issues one of the things that quickly came up was potential consolidation.”

He explained CP could route any infrastructure and capacity east of the Mississippi River, with shareholders saying that with compelling operating and financial numbers perhaps CP should link up with an Eastern carrier, for example, and create even greater synergies to solve these issues, which led to its interest in NS, and try to engage with them and get into a dialogue with NS, which he said has no downside.

In its response, NS issued a white paper by two former STB chairmen who believe that the STB would not approve any voting trust structure because there is no basis to determine that it would be in the public interest.”

The white paper, which was written by former STB commissioners Francis Mulvey and Charles Nottingham noted that rail carriers cannot assume control of another carrier without prior STB approval.

“The STB’s approval process can last between 19 and 22 months,” they wrote. “Current STB regulations, adopted in 2001, set a high bar for approval of a proposed major merger and related voting trust based on an untested public interest standard.  In our expert opinions, the STB is not likely to approve CP’s proposed voting trust or the CP+NS merger.”

The former STB chiefs added there is every reason to expect substantial opposition to the merger from various concerns, including other railroads, shippers, labor interests, and community and environmental groups, while also citing CP’s drivers for the deal that that STB could view “with a large grain of salt.

From a general industry perspective, a railroad executive told LM that a CP-NS merger should not be viewed as a merger of necessity, with some of the main issues in the industry, like significant energy-related declines and a manufacturing slowdown, not able to be efficiently solved or addressed by mergers.

The freight railroad sector has shrunk from 56 Class I railroads in 1975 to seven in 2005. And with such few players it makes the current situation regarding Canadian Pacific’s unsolicited nearly $30 billion offer to acquire Norfolk Southern interesting in that aside from CP, obviously, there does not appear to be a ton of public support for the proposed deal.

One example of that was found in a recent shipper survey by investment firm Cowen & Company, which found that 71 percent of surveyed shippers were not in favor of a CP-NS merger.

And with the current balance of power in North America among the Class I railroads––two in the east, 2 in the west, one in the middle, and 2 in Canada––industry experts say it has created a very stable playing field, but were one of the legs of this “table” to be pulled, it would require some sort of response among the other members of the supporting cast, which he said is not likely in their best interests.