CP Rail (TSX:CP) rolled out a revised offer today in its contentious bid to acquire U.S.-based Norfolk Southern Corp. (NYSE:NSC).
But the new offer, which CP CEO Hunter Harrison claimed reduced regulatory risk and sweetened the financial pot for NSC shareholders, was summarily rejected by Norfolk’s chairman and CEO Jim Squires as being “even more uncertain and risky” than CP’s offer tendered last month.
In the revised offer letter to Squires, Harrison stated that to alleviate U.S. regulatory concerns over the merger’s potential reduction of railway competition in North America, CP is prepared to close the deal into a voting trust, which would give shareholders “a substantial cash payment and shares in a new investment grade company which would be listed on both the NYSE and TSX.”
The deal would give NSC shareholders $32.86 in cash and 0.451 shares of stock in that new company, which would own NSC and CP.
It reduces the per-share cash amount from the previous offer’s $46.72, but would increase shareholder equity from the 0.348 shares of stock in the new entity included in the previous offer.
Harrison estimated that the new deal would improve the premium to the unaffected share price of $79.14 to 77% from the estimated 59% contained in the previous offer.
The voting trust arrangement would also provide a cash closing for shareholders in May 2016 rather than the December 31, 2017, closing were the merger to await Surface Transportation Board (STB) approval in the United States.
Under the trust arrangement, an independent trustee would be appointed to oversee the operations of either CP or NSC, and, regardless of which was placed in trust, Harrison would become CEO of NSC and sever all economic and other ties with CP.
According to CP numbers, Harrison, the former head of Canadian National (TSX:CNR), has increased returns to CP shareholders 306% since he took over as CEO in June 2012.
CP’s current market cap is US$23 billion; NSC’s is US$24 billion.
CP estimates base revenue growth of the merged company would be 3% beyond 2018, when the new entity would be fully up and running.
It claims the new entity would achieve $1.8 billion in operating efficiencies and synergies and provide shippers in Canada and the United states with better access to tidewater shipping facilities and major metropolises east of the Mississippi via one major efficient rail network that would allow freight to reroute around such major bottlenecks as Chicago.
But, in a press release, Squires said CP’s “revised, reduced proposal is not only less than what the Norfolk Southern board has already found to be grossly inadequate, it is even more uncertain and risky given the decrease in the cash consideration. In addition to being grossly inadequate, the proposal is based on a voting trust structure that we reviewed and do not believe would be approved by the STB.”
Squires added that, according to a NSC white paper released December 7, “the STB would not approve any voting trust structure because there is no basis to determine that it would be in the public interest."
CP’s share price was down $5.83 to $170.28 in the early morning trading following release of the new offer; Norfolk’s stock was down around $3.32 to $88.20.
