CP's Harrison Targets Norfolk Holders as He Weighs Sweetened Bid

  • `I prefer not to use the word hostile,' CEO says of approach
  • Deal catalysts: `a little more money,' investor pressure

Canadian Pacific Railway Ltd. is willing to sweeten its $28 billion takeover offer for Norfolk Southern Corp. and is “going to do everything we can” to court the U.S. carrier’s shareholders, Chief Executive Officer Hunter Harrison said.

After an initial meeting last week with Norfolk Southern management ended inconclusively, getting the deal moving will take “a little more money” and pressure from investors, Harrison said Friday in an interview at Bloomberg’s headquarters in New York.

“I prefer not to use the word hostile -- you all can describe it as you see fit,” Harrison said. “We’re going to work diligently to get to the shareholders. They deserve to see this, to understand it. We’ve already at their request shared the strategy. Some of them came to us and said: ‘Make a move.’ They’re big holders. They’re players, and there’s not only one.”

Harrison’s comments escalated his campaign to create a transcontinental railroad by combining Canada’s second-largest carrier with Norfolk Southern, the No. 2 operator in the eastern U.S. The CEO, a veteran railroader recruited out of retirement to lead Canadian Pacific by activist investor Bill Ackman, is bucking the long-held industry view that the era of big mergers is over.

Harrison returned several times to the idea that Norfolk Southern shareholders found the concept of a combination intriguing. Some even suggested he explore a deal, he said.

“It’s fair to say we’ve had a good bit of dialogue with their shareholders,’’ he said. ‘’Some of them brought these ideas to us, whether we already had them or not. If it’s a good deal for the shareholders, why is it not a good deal for the overall organization? They’re going to have to answer that. I can’t."

Canadian Pacific doesn’t want to surrender its investment-grade credit rating, which will put a cap on how high an offer the Calgary-based railroad may make, Harrison said, while declining to elaborate on the terms.

“We’re not going to go crazy,” Harrison said. “I’m not in love with a deal. So is there a place where we are going to say: ‘Price is too high. We’re walking?’ Absolutely.”

Harrison also said he planned to reach out again Friday to CEO James Squires at Norfolk, Virginia-based Norfolk Southern.

“Given some of their wants, we’re happy to sit down with them,” Harrison said. “In fact I think there’ll be some correspondence going out to them today saying ‘Let’s sit down and talk.’ Through an e-mail.’’

Norfolk Southern acknowledged the merger overture on Tuesday, eight days after Bloomberg News reported that Canadian Pacific was exploring a bid. It labeled Canadian Pacific’s offer “unsolicited, low-premium, non-binding and highly conditional indication of interest” that was less than 10 percent higher than the day’s closing price. A spokesman, Frank Brown, declined to comment when asked about Harrison’s remarks.

Stock Rally

The signals of disinterest aren’t deterring investors. Norfolk Southern surged 22 percent through Friday from Nov. 6, the last trading day before Canadian Pacific’s interest was reported, while the Standard & Poor’s 500 Index slid 0.5 percent. Canadian Pacific jumped 11 percent in that span.

Norfolk Southern rose 0.7 percent to $97.56 Friday in New York. That exceeded the $94.02 price that was indicated based on Canadian Pacific’s offer of $46.72 in cash and 0.348 share of stock, as of the Nov. 13 close. Canadian Pacific gained 0.8 percent to C$198.88 Friday in Toronto.

Even if Norfolk Southern eventually assents, regulators loom as one challenge for consummating a deal. Opposition from the U.S. Surface Transportation Board spurred the collapse of the last proposed transcontinental tie-up -- a Burlington Northern Santa Fe Corp.-Canadian National Railway Co. combination in 2000.

Harrison said Canadian Pacific’s approach takes into account the views of regulators and shippers, with steps such as opening up some terminals so customers would have more rail choices.

Voting Trust

One solution to the risks of a lengthy review, Harrison said, would be to create a voting trust so that Norfolk Southern investors get their money while the U.S. railroad keeps operating on its own pending government clearance. He said Norfolk Southern could be run in the interim by a Canadian Pacific executive -- and he suggested himself as a possibility -- so that merger integration is swift and seamless once regulators sign off.

A similar arrangement was put in place at Illinois Central Corp., according to Harrison, 71, who was running that railroad when Canadian National acquired it in 1998. He went on to run Canadian National as well.

“If one of the companies went into trust, then we could close the transaction very shortly after the agreement, within probably 60 days,” Harrison said.

Another way to structure a transaction would be to create a “small” holding company that would oversee both railroads, Harrison said.

Under that scenario, Norfolk Southern and Canadian Pacific would “maintain their headquarters, their autonomy, their traditions,” Harrison said. The new entity, created at a “neutral” site, would be tasked with “matching up the synergies between the two organizations” after the merger was approved, Harrison said.

Since joining Canadian Pacific in 2012, Harrison has led a turnaround that transformed one of the North American industry’s least-efficient operators into one of its leanest carriers. Norfolk Southern now bumps along at the bottom of the region’s major carriers as measured by operating ratio, a benchmark gauge that compares revenue to expenses.

That laggard status makes Norfolk Southern an attractive target, and should help sell a deal to investors, Harrison said.

“We have no plans at this point to do a tender offer,” Harrison said. “All we want to do is to be able to present our case to the Norfolk shareholders and say: ‘How does this sound to you?’ If they say it sounds bad, we go home.”

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