‘The greatest railroader of all time’

CALGARY, Alberta — Bill Ackman, Canadian Pacific’s activist shareholder, says in a conference call today that E. Hunter Harrison is the “greatest railroader of all time” and that he is the premium Norfolk Southern shareholders would receive regardless of whether a proposed merger of the two companies comes to fruition.

Catch that quote, Harrison’s thoughts on the “public interest” and more in Part II of the best comments we’ve heard from Canadian Pacific’s conference call with investors this morning:

Bill Ackman:
“If I were not on the board of CP, I would be buying stock today in NS and considering seriously putting up a slate of directors as a shareholder activist. … This is an ideal activist situation. You have a situation where, if the transaction goes through, it’s worth $125-plus [per share] to NS shareholders. And if the transaction fails, you have a management team that has a $90 sort of price target. … I would think the big shareholders of Norfolk Southern railroad are going to pick up the phone and speak to the board, and people are going to sort of come to their senses.”

“I think it was appropriate for the board to reject our first overture. Because there was uncertainty, and it’s very common for a first offer like this to be rejected.”

Hunter Harrison, on possible objects to the deal by other railroads:
“Let’s say Railroad A objects. Why do they object? Why do they object to something that’s pro-competitive? You know what they’re objecting for? They’re hiding behind this whole issue of saying, ‘Look, we like this duopoly. We don’t like to have more competition brought in. We like to have paper barriers. We like to have all that artificial protection,’ and it’s been stripped from them.”

Harrison, on the possibility that this would cause other mergers:
“Look, I can make a case that the four big boys in the U.S., that somehow they do some combination. CP doesn’t have any compelling position there that’s going to hurt them. So it’s their decision. I don’t see it as an automatic that they’ve got to merge themselves with the two giants in the west because of something CP’s doing, this western Canadian railroad. I just think it’s a lot of rhetoric about nothing.”

Harrison, asked about the timing of this deal, and whether this is an indication that CP faces difficulties with its current stand-alone plan and needs a merger to drive its value:
“We got a signal from them that we ought to talk, a signal from a shareholder and a member of their board. So we went and talked and we wasted two hours. And quickly we got off of that.

“Look, I’ve worked with Norfolk Southern, adjacent to them, all my life. I have tremendous respect for the railroad, their tradition and culture and all. But for whatever reason, they’ve gotten a little off track the last 10 years … and that was admitted to me by Mr. Squires, that they were stuck or in a rut or whatever it was.

“And at the same time this is going on, we look and see that they lose what I call three pretty key executives: the chief of marketing and sales, who was tremendously respected within the industry; they lost the CEO … and their operating chief announced his retirement early.

“Now, with all of that going on, we thought it might be an opportunity here.”

Ackman:
“NS said that we refused to sign a confidentiality agreement, that they were willing to talk to us but we refused to sign a confidentiality agreement. … It was a small part a confidentiality agreement and a big part a standstill agreement. The standstill agreement said you can’t make a proposal, you can’t do anything for two years. And so of course we couldn’t sign it. …

“Mr. Squires is a lawyer. He knows the difference between a confidentiality agreement and a standstill agreement. And he misled shareholders when he said we refused to sign a confidentiality agreement.”

Harrison, asked about CP’s reaction if NS found a different merger partner:
“If they make a deal with somebody else, and it works and it’s got all the compelling issues we’ve talked about here, more power to them. I’m not going to object to mergers. … We’re not opposed to, if you can live up to the rules, mergers. We think they’re good. We think they’re healthy.”

Harrison, asked why CP chose to pursue NS rather than revisiting its interest in CSX Transportation from 2014:
[A pause] “I want to be very delicate here, and that’s not my strong suit.
“It just didn’t fit in Florida. It became clear and obvious that they’ve got some of the same issues as far as regulatory approval, and we didn’t get beyond that. Once again, we were responding to a request of theirs. And I really thought it was totally inappropriate the way we were treated, which is important to me in the culture of an organization. I like to be able to trust people, to shake their hands, to make a deal, and it just became evident to me quickly that there was a split. They weren’t on common ground, and that wasn’t going to work.
“Because it’s one thing to get these deals done … it’s something else to make it work down the line. You’ve got to do both to make it successful.”

Harrison, on the public-interest aspect of potential STB approval:
“It’s such an ambiguous statement, that anybody can argue any case. What the hell is public interest? Get that defined for me. … What’s in one public’s interest and not another public’s interest. That’s just a way, in my view, of kind of removing the rules and let the bureaucrats deal with it.”

Ackman, on the breakdown of cash and stock in the latest offer:
“What matters here is the stock component. If you believe in Hunter Harrison, and you believe in the transformation of NS, then you want as much stock as you get.

And the way we’ll set this transaction up is that we’ll give shareholders the opportunity to select cash or stock, and we’ll prorate. And if people want cash, they can have as much cash as is available. But what I think you’ll find is that the vast majority of shareholders are going to select stock, and the stock will be the scarce asset here. … The reason they’re going to want stock is that the stock is going to increase meaningfully in value when the transaction closes.”

Ackman, asked how confident he is that activist shareholders will step in and drive a deal:
“We’re in an unprecedented price environment, particularly in respect to thermal coal and things like that. I don’t believe that there is a shareholder of NS who believes that management’s recent statements about getting to a 65 [percent operating ratio] are credible, particularly in light of the environment. That obviously puts a lot of pressure on Norfolk over time. And if I were shareholder of the company … if you think the company is not observing their fiduciary duty and considering a transaction they should consider, you’re going to tell that to management, and you may tell to that to the board of directors. And that has a huge impact. …

“We think it’s more likely than not at the end of the day that these companies merge, and if they don’t, it’s literally a paper transaction to split these companies and spin one off of the other. So that’s about as low-risk a transaction as you can identify, and you get the benefit of the greatest railroader of all time as your compensation for going through the process.”

Harrison, asked if CP would pursue other opportunities if this deal does not work out:
“I think we will not change our view of the potential that mergers have … and I think it’s important for North America and the U.S. Now are our options becoming more limited, is the change I’ve tried to create a little more difficult than I thought? Yes. But I think that’s not something to come off our radar screen. …It’s something that I think will happen eventually.”

Harrison, asked if CP was willing to pursuit a proxy fight and hostile takeover if necessary:
“Unless they’re some compelling reason I don’t know about that it shouldn’t happen, call it what you want to, but we’re going to do everything at our disposal to get this to the shareholders and get a resolution. If that calls for a proxy, so be it.”