“We are increasing our offer to NS shareholders by as much as $3.4 billion through the addition of a contingent value right,” Mark Erceg, CP’s executive vice president and chief financial officer, said during a conference call this morning with investors and Wall Street analysts.
The basics of the $30 billion proposal remain the same: NS shareholders would receive $32.86 in cash in May 2016 and 0.451 shares in the new CP-NS company. The wrinkle CP added today is that NS shareholders would receive 0.451 of a contingent value right, or CVR.
What’s a CVR? “Think about this as a long-term insurance policy on the share price,” says Bill Ackman, a CP board member and head of Pershing Square Capital Management, CP’s largest investor.
The CVR puts a floor beneath the share price of the combined CP-NS. It would protect investors if the CP-NS share price falls below $175. The CVR would be worth up to $25 and is a liquid investment that could be sold immediately after CP is put in a voting trust in May 2016.
“The CVR gives significant value to shareholders — unless we’re right,” Ackman says, adding they’re willing to bet $3.4 billion that CP-NS is worth at least $175 per share. “We’re not betting that money recklessly.”
CP values its latest offer as a premium of between 58 percent and 77 percent — the same premium of its second offer, which was made on Dec. 8 and immediately rejected by NS.
The two railroads have disagreed on the value of the merger offers and have escalated their war of words over the past week. CP CEO E. Hunter Harrison said the CP-NS battle has turned into a “street fight environment,” adding, “if this is going to be a street fight, so be it.”
There are two ways that CP can move forward with a transaction in light of continued opposition from NS, Ackman says. Both require resolutions by current shareholders, which would need to be filed with NS by Feb. 14, 2016.
The first is a simple shareholder resolution asking the NS board to engage with CP to see if a deal can be worked out. The second — and more complicated — route would be a proxy contest that would seek to replace the NS board of directors with a slate of candidates who favor a merger.
In either case, it’s likely the outcome would be decided at or before NS’s annual shareholder meeting in May, Ackman says.
CP insists that its two-part merger plan can succeed.
The first part — putting CP in a voting trust, having Harrison sever ties with CP and become CEO of NS — is highly likely and will win STB approval, Ackman says. Harrison would then launch operational improvements at NS, which would save the company $1.2 billion and drive up its share price.
The second part — gaining STB approval of the merger, a process that could last 16 months — is less certain, Ackman says. But NS shareholders would be rewarded in either case, he says.
CP’s stock-and-cash offer would be worth $125 to NS shareholders if the STB ultimately rejects the merger. If the STB approves the deal, it would be worth $140 for NS shareholders, Ackman says.
NS did not immediately respond to CP’s latest offer.
UPDATE: Dec. 16, 2015, 10:42 a.m., Central time. Details from Canadian Pacific’s Wednesday conference call.
@Merrill R Perkins, That's the truth! It's more so with Canadian Pacific than Union Pacific. Harrison just wants to get rid of some competition and get greedy. With the Canadian Government investigating CP, the so-called merger with NS will more than likely never happen, because Harrison's all ready in HOT water over safety issues on the CP. Seems to me he could care less about his employees or NS's or even safety in general!
@Josh Monroe, Norfolk Southern is my second favorite railroad next to CSX (Conrail is STILL my favorite all time railroad). The biggest thing I hate about the "merger" w/ CP, is say goodbye to the Heritage Units AND the SD45-2's! Canadian Pacific locomotives on Horse Shoe Curve or in the South in general, NO WAY! They would look way out of place in Kentucky and Tennessee let alone Florida! Splitting Canadian Pacific (Canadien Pacifique – French speaking) would provide MORE competition Up in Canada. THAT makes more sense! I question Hunter Harrison's leadership of CP, AND when he was at Canadian National. He needs to resign and never be heard from again!
@ Frederick Fine, the "Pacific" in both CP and UP should really be read as "Pathetic" …
Show me the monnnneyyy.
Now there's an idea!
I've come up with the best idea yet! BNSF, CSX, Norfolk Southern and Canadian National SPLITTING Canadian Pacific, and getting rid of the pain: Hunter Harrison!
NS didn't respond to the offer, but the market did. NS stock went way down. I guess the market as a whole isn't as enamored with EHH's cult of personality the way Ackman is…
There are 2 US Class 1s and 2 Canadian Class 1s in the Northern half of the US, from the East Coast to the Mississippi River; NS, CSX, CP & CN. Hunter Harrison you merge NS and there's Canadian Railroad (pardon me RAILWAY) Monopoly! CSX would then be the last remaining US Class 1 in the whole Eastern half of the US! BUT I'd be DARNED if Union Pacific would start courting CSX for a merger! I still say split Union Pacific, it's the one railroad I'm not very found of and Canadian Pacific is right there with them, too!
There is a lot more to a railroad than just money and investors !
If I can be indulged in a repost from a few days ago, I think these thoughts remain germane. NS is under intense pressure to cave. If Fred Frailey is right that is precisely what they will be forced to do–and alas–because there is nothing in this proposal except a one-time only bonanza for large holders of NS stock.
The residual holders of the combined company will be saddled with a pile of new debt, very few provable savings from the elimination of duplicate operations (because there basically aren't any) and an operating plan that once again repeats the old railway era of going for deferred maintenance and investment over the long-term value enhancement of the property and the stock-holders.
At its most basic core the much larger (and still very prosperous) NS ends up as a 47% owner of a debt-saddled company owned by the much smaller CP, on the basis of the argument that one man's "genius" at squeezing employees, investment and service is better than NS long-term health. My earlier thoughts from a Frailey blog posting last week follow.
"I'd like to share observations on the NS/CP merger I first posted on the Fred Frailey blog that described Harrison's management approach. While this time I disagree with Mr. Frailey I strongly suggest a reading of his typically insightful column.
The CP plan for the take-over of NS is based on many flawed assumptions, but fundamentally and at its core the main problem is that there are almost no synergies to be gained by eliminating duplicate routes or terminals. Rather the entire proposal is based on what Fred outlines, but interprets very differently from me, the cult of personality built around Hunter Harrison and his laser focus on cost-cutting and what he sees as operating efficiency.
Harrison's preference for scheduled freight operations is sound (in some cases) and echoes what the D&RGW did in the last 20 years of its existence to compete with the UP's faster route across Wyoming–run trains frequently to a predictable pattern, keep the railroad fluid and minimize terminal time. All fine, but this is not 1974 and the Burnham Yards. With little investment in new equipment the CP is increasingly at the limits of its capacity. A reckoning is coming.
The flaw in the Harrison approach is its reliance not only on maximizing the use of assets, but also on reducing maintenance and investment in equipment and physical plant. In the short-term this gives you, as Fred points out, a drop in the operating ratio, but in the longer term it almost guarantees the sort of operational melt-down which the ex-Harrison CN is now experiencing east of Winnipeg. Mr. Frailey has personally experienced this on the VIA "Canadian" as it dragged along for hundreds of miles, getting later and later, behind behemoth drag freights that were so long they could not go into a siding to be passed, and thus effectively converted the CN main line into a one-way street for hours at a time, until they finally reached either a yard or a (rare) stretch of double track (longer sidings were not a Hunter Harrison priority despite climbing volume).
Harrison got to the CP just as oil traffic boomed and western Canada enjoyed unprecedented grain harvests. He was the beneficiary of these trends, but the CP also was subject to capacity-related (and crew and equipment availabity) congestion addressed in emergency orders from the Canadian Ministry of Transport. Nor should we celebrate the failure to buy a new locomotive for the entire Harrison tenure. Far from showing wisdom, this constrains potential growth and will lead inevitably, when oil demand and (or) grain traffic again surges, (not to mention multi-modal growth) to maintenance and equipment availability related delays. If the Penn Central showed us anything it was the flaw in deferred maintenance and investment. If you fix things only when they break eventually everything breaks.
The Wall Street critique of NS is both unfair and ill-informed. NS is hardly at fault for the collapse in the coal market and NS has certainly taken actions to improve and grow–ranging from unscrambling the 2013 parking lot conditions between Chicago and Toledo, to adjusting it's Road Railer operations, to closing former Virginian (coal) routes. NS is hardly a failing railroad. It is the only Class One to consistently cover the cost of capital from its profits. It's operating ratio of 70.0 is not as low as the CP's 65.7 and shouldn't be, as the CP ratio reflects very bad cost-cutting that is already coming back to snap at shippers and the public, if not yet at Harrison's ego.
Nor is the NS critique of the proposed merger unfair. NS is substantially larger than CP, yet is being offered the 47% pauper's share of the merged company. And even at that, the CP will be forced to borrow heavily to cover its proffered offer, leaving the merged combination deeply in debt. As noted above there are few if any route consolidation savings pending. Even the "Chicago problem" CP claims to solve in truth changes hardly at all, as CP already enjoys access to NS routes around and east of Chicago and the combined companies gain no new lines there.
This merger is a ploy by Hunter Harrison (and Bill Ackman's hedge fund) to allow Harrison go out as the early 21st century E.H. Harriman–the man who tried (and fortunately failed) to merge it all west of Chicago at the end of the 19th century. Harrison's reputation is based on ego (and luck) as much as real long-term accomplishment. This merger is solely based on his presence. What would be the outcome if he were to become ill and could not continue? Would the case then against Jim Squires look so compelling?
Nor should we overlook matters of personal style.That Harrison's treatment of his colleagues echoes the dictatorial manner of Southern's D. W. Brosnan or the New York Central (and WP's) Al Perlman is not a blessing if you are on the receiving end of the daily diatribe. I know–kindness is not necessarily a business virtue–but intimidation isn't either, at least not in the longer term. Both Brosnan and Perlman tempered their autocratic manners with a willingness to invest in their railroads. On the Southern it was CTC, welded rail, fast freights and mentoring geniuses (and gentlemen) like W. Graham Claytor. On the NYC it was a real commitment to scientific research, new yards, CTC, multi-modal innovation and yet there too the good short-term results of Perlman's tenure was largely undone by the most ill-fated of all railway mergers. Perlman's tragedy was he saw the PC debacle coming, yet proceeded because he could no longer count of Wall Street's support to stay the course as an independent road. On paper NYC/PRR looked so obvious, but in the real world a merger like the NYC with the B&O/C&O would probably have been far more viable. In any event CP/NS makes far less railroad sense than PC.
For my part at least I hope for once the benefits of long-term investment and sensible management prevail and that NS can go on as an independent company, at least until presented with a merger that is not driven by the legacy agenda of one man and the short-term greed of Wall Street speculators."
I wish EHH and the hedge fund knuckle heads at CP would stop trying to take over the world and just run there railroad, and leave the NS alone. Now's not the time for theses actions.
I think that if CP wants NS, they're gonna need to ask their friend Santa for it because they don't seem to be getting them otherwise.
From what I've seen of it, this looks to be another weak offer.
Seems that Harrison is that determined to kill the 21st Century Steam program and heritage units.
…and with this announcement, NS stock went down, down, down. The market was underwhelmed .
Does someone need to literally tell Harrison to go sit & spin on an asbestos-wrapped barrel cactus in order for him to get the message?