Reuters — U.S. railroad operator Norfolk Southern said Friday its board had rejected Canadian Pacific Railway’s US$28.4 billion offer, calling it “grossly inadequate” and could face substantial regulatory hurdles.
A struggling coal transportation market, suppressed by weak market demand and global oversupply, has weighed on the earnings of Norfolk, making it more vulnerable as a takeover target. But on Friday the company put forward a passionate defense of why it should go it alone.
“The board believes that Canadian Pacific’s proposed transaction is opportunistically timed to take advantage of Norfolk Southern’s market valuation,” Norfolk CEO James Squires said on a conference call with analysts.
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He added that the regulatory hurdles would remain the same “at any offer price.”
Norfolk’s shares have fallen 15 per cent this year, in tandem with other U.S. railroad stocks that have been hurt by a fall in high-margin coal shipments and weak oil prices. They were down 1.3 per cent at $91.85 in afternoon trading (figures in US$ except where noted). CP shares were down 4.1 per cent at C$180.13.
Calgary-based CP had first made its offer for Norfolk public on Nov. 17, but met with an unenthusiastic response from Norfolk.
Norfolk’s rejection is a blow for Bill Ackman’s activist hedge fund Pershing Square, CP’s largest shareholder with a 9.1 per cent stake.
Ackman, a big advocate of consolidation in the North American railway sector, is under pressure because a plunge in the stock price of Valeant Pharmaceuticals — another important holding — has left Pershing with considerable losses.
Pershing declined to comment on the Norfolk bid.
CP’s railroads are just north and south of the U.S.-Canada border and generally run east to west, while Norfolk’s routes are up and down the U.S. east coast.
CP has said the combined railroad network would offer competitive rates for shippers and $1.8 billion annual savings for the two companies.
Regulatory hurdles
Canadian Pacific has also said the merger would satisfy the U.S. Surface Transportation Board (STB) and Canadian regulators, an idea Norfolk has summarily dismissed.
“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,” Squires said.
The STB has a public interest test when considering mergers. A deal would have to result in improved service, economic efficiencies and public safety.
CP, in a statement Friday, said it’s “disappointed” with the rejection from Norfolk and “takes exception to the claims, misdirection and mischaracterization of its offer and the benefits such a combination would provide.”
The company said it would further discuss the U.S. company’s concerns about regulatory approval, and “correct every inaccuracy” raised, in a conference call Tuesday (Dec. 8).
CP will now likely take the offer directly to Norfolk’s shareholders, FirstEnergy Capital analyst Steven Paget told Reuters.
“(The combination) will roughly double the size of the company,” he said, making it “a driver of the massive network east of the Mississippi.”
CP CEO Hunter Harrison had previously said it would probably have to increase its offer to win Norfolk Southern over.
Asked about whether Norfolk had the backing of its top shareholders, Squires told Reuters in an interview that the company had investor support for its revenue growth initiatives that focus on faster railways and superior customer service.
“We obviously factored in our shareholders’ view in considering the proposal that we rejected today. We know that our shareholders expect value creation from us. We have a new team in place with a plan to improve our performance and drive shareholder value,” Squires said.
— Reporting for Reuters by Ankit Ajmera and Sneha Banerjee in Bangalore; additional reporting by Svea Herbst-Bayliss in Boston and Greg Roumeliotis in New York. Includes files from AGCanada.com Network staff.
