Norfolk Southern mulls $28.4 billion offer

Published November 30, 2015 by Robert Powell, III

Norfolk Southern Corp. said that its board of directors would review an unsolicited $28.4 billion acquisition offer from Canadian Pacific Railway Ltd., Canada’s second-largest railroad.

The Norfolk-based company’s initial reaction to the offer, however, showed little enthusiasm for a deal.

Norfolk Southern described the offer as a “low-premium, non-binding and highly conditional indication of interest,” in which Canadian Pacific would acquire the company for $46.72 in cash and 0.348 Canadian Pacific (CP) shares for each Norfolk Southern share.

The offer represents “a premium of less than 10 percent based on closing prices” on Nov. 16, Norfolk Southern said. Its stock price was $88.30 that day.

The company also raised questions about potential regulatory hurdles.  The deal would have to pass muster with the U.S. Surface Transportation Board and Canadian regulators.

While the offer was disclosed on Nov. 17, it was initially made in a letter to Norfolk Southern CEO James Squires on Nov. 9. “Mr. Squires asked CP CEO Hunter Harrison to hold off on sending this letter until such time as the two CEOs could meet face to face, which occurred last Friday November 13, 2015,”  Canadian Pacific said in releasing the letter.

The letter said its acquisition proposal represented a 23 percent premium at that time over Norfolk Southern’s 45-day volume-weighted average of $79.14.

The disclosure of the offer capped weeks of rumors that the two companies had entered preliminary talks.

“We believe that combining our two great organizations will allow us to form an integrated transcontinental railroad with the scale and reach to deliver unsurpassed levels of safety and service to our customers and communities while also increasing competition and creating significant shareholder value,” says the letter, which was signed by Harrison and Andrew F. Reardon, Canadian Pacific’s chairman of the board.

Norfolk Southern shareholders would own 41 percent of the share’s in the combined company, according to the proposal.

The letter says a deal would create a “transcontinental rail network connecting the major industrial production and population centers across North America,” reaching major ports located on the Gulf of Mexico, the Atlantic and the Pacific.

Canadian Pacific said the deal would create $1.8 billion in annual operating savings during the next several years plus substantial tax savings.

Canadian Pacific also said it had a financing commitment of $14.2 billion from J.P. Morgan Securities LLC.