- U.S. railroad said to see Canadian Pacific deal as unworkable
- Activist's campaign is seen as effort to stir up investors
Norfolk Southern Corp. is meeting with investors this week to promote its new operating plan as part of an effort to convince them that it’s doing the right thing in shunning a takeover by Canadian Pacific Railway Ltd., according to people familiar with the matter.
The sessions follow an appeal by activist Bill Ackman to foment a shareholder revolt at the U.S. railroad. Norfolk Southern’s message is that regulators wouldn’t approve a deal creating a transcontinental carrier or Canadian Pacific’s proposed voting-trust structure, said the people, who asked not to be identified because details are private.
Norfolk Southern sees Ackman, whose Pershing Square Capital Management is Canadian Pacific’s biggest stock owner, as challenging other activists to trigger a proxy fight in favor of a merger, the people said. The U.S. company isn’t preparing a formal proxy defense because it sees the regulatory hurdles as deterring anyone else from jumping in, the people said.
The outreach to investors shows Norfolk Southern’s determination to keep resisting Ackman and CP’s push for a tie-up between Canada’s second-biggest railroad and the No. 2 operator in the eastern U.S. While Norfolk Southern hasn’t formally rejected Canadian Pacific’s revised bid, it snubbed the offer on Tuesday as “grossly inadequate.”
Norfolk Southern also expects that regulators would worry that a merger would spur more consolidation in a North American industry dominated by just six carriers. BNSF Railway Executive Chairman Matt Rose said Thursday he would be open to bidding for Norfolk Southern and won’t sit on the sidelines of any fresh dealmaking.
Spokesmen for Canadian Pacific, Norfolk Southern and Pershing Square declined to comment.
Canadian Pacific’s latest cash-and-stock bid valued Norfolk Southern about $27 billion, based on the Canadian company’s closing stock price on Monday. That was about the same as the market value for the U.S. railroad, which spurned Canadian Pacific’s initial overture last week.
Ackman and Canadian Pacific Chief Executive Officer Hunter Harrison laid the groundwork for a proxy fight during a conference call on Tuesday. They borrowed heavily from the playbook used three years ago when Ackman’s Pershing Square Capital Management garnered support to oust board incumbents and CEO Fred Green, and hire Harrison.
“We’ve seen this movie before,” said David Tyerman, a Canaccord Genuity analyst in Toronoto who rates Canadian Pacific as a buy and doesn’t follow Norfolk Southern. “There are a lot of parallels with 2012.”
Harrison said last year while weighing an offer to CSX Corp. that any merger among North America’s top-tier railways probably would have to be friendly. While Norfolk’s current board and management may oppose a takeover, new directors or a CEO installed through a proxy fight could push for a deal.
Ackman and Canadian Pacific management attacked Norfolk Southern’s status as the least-efficient North American railway and the credentials of CEO James Squires, 54, who joined the carrier in 1992 and came up through the finance and administrative ranks. The jabs echoed Ackman’s earlier attacks on Canadian Pacific’s operations and on Green.
Harrison, 71, refashioned Canadian Pacific into one of the region’s most-efficient railroads after years of lagging behind its peers. That experience is a central part of Canadian Pacific’s arguments for a deal, because Norfolk Southern has been trailing major rivals as measured by operating ratio, which compares expenses as a percentage of sales.
“If I were not on the board of CP, I would be buying stock,” Ackman said on the conference call. “This is an ideal activist situation.”
The new operating plan being taken to investors this week by Norfolk Southern follows the carrier’s pledges last week to cut that ratio to 65 percent by 2020. It has a way to go: Last year’s 69.2 percent was its best in at least a decade, according to data compiled by Bloomberg.
The people familiar with Norfolk Southern’s strategy said the railroad remains steadfast that neither the merger nor the trust structure Canadian Pacific has proposed would win regulatory clearance.
That’s in part because of regulations implemented by the U.S. Surface Transportation Board last decade that would require the carriers to prove that such a transaction would improve competition. The previous standard was simply to show that a deal wouldn’t hurt competition.
Canadian Pacific’s proposal envisions putting itself into a voting trust and Harrison taking over as Norfolk Southern CEO after severing all economic ties with his current employer. Chief Operating Officer Keith Creel, Harrison’s designated successor, would then become the Canadian company’s CEO, according to the railroad. Harrison has said moving an executive to Norfolk Southern would pave the way for a smooth merger integration once regulators finish a review.
Norfolk Southern believes that Harrison becoming CEO would violate Surface Transportation Board rules barring a change of control before the matter is reviewed, the people said. It also believes putting CP into a voting trust for as long as two years while the deal is assessed wouldn’t be in the public interest, as is required by regulators for approval of the trust, the people said.