Ackman Joins CP Rail Fray After Norfolk Southern Rebuffs Bidby and
Norfolk CEO doesn't have operating track record, investor says
U.S. railroad calls new offer `even more uncertain and risky'
Activist investor Bill Ackman jumped into Canadian Pacific Railway Ltd.’s battle to take over Norfolk Southern Corp., saying the U.S. company’s chief executive officer lacks the background to turn the railroad around.
Canadian Pacific CEO Hunter Harrison is the greatest railroader of all time, said Ackman, whose Pershing Square Capital Management owns the largest stake in the Canadian carrier.
“It’s a real leap of faith for people to assume that all of a sudden, beginning a week or two after the CP offer,” Norfolk Southern has a plan to improve efficiency, Ackman said in a conference call Tuesday with Canadian Pacific management. Norfolk Southern CEO Jim Squires “does not have a proven track record for turning around railroads.”
Ackman’s comments added a personal note to a fight marked by Norfolk Southern’s rejection of two offers from Canadian Pacific, the most recent one on Tuesday. Harrison, 71, is seeking to build a transcontinental rail network that would reduce the need to switch cars between carriers and test U.S. merger rules rewritten about 15 years ago that ended a flurry of consolidation.
Canadian Pacific said its new bid was more attractive financially and would reduce regulatory uncertainty. Shareholders would get $32.86 in cash and 0.451 share of stock, the Canadian railroad said. That indicates a value of $27 billion based on Canadian Pacific’s closing price Monday, about the same as Norfolk Southern’s market value at the close. The new offer would increase Norfolk Southern shareholders’ ownership of the combined company to 47 percent from 41 percent.
It took Norfolk just 40 minutes to issue a statement Tuesday rejecting the latest terms.
“Canadian Pacific’s revised, reduced proposal is not only less than what the Norfolk Southern board has already found to be grossly inadequate, it is even more uncertain and risky given the decrease in the cash consideration,” Squires said in a statement.
Norfolk Southern last week rejected an earlier offer of $46.72 in cash and 0.348 share of Canadian Pacific.
Ackman said Canadian Pacific would be prepared to reduce the stock component of the offer in favor of cash to get Norfolk Southern’s approval and expected to conduct a friendly deal. Harrison said that if a proxy fight was required, “so be it.” The U.S. company’s stock fell 5.7 percent to $86.32 at the close in New York, the biggest one-day decline since October 2012. Canadian Pacific dropped 2.5 percent to C$171.64.
A spokesman for Norfolk Southern declined to comment on Ackman’s remarks.
Ackman detailed Harrison’s track record of improving operations and boosting value of three railroads, including Canadian National Railway Co. and Canadian Pacific, and contrasted that with Squires’s career in law and finance. Squires, 54, became CEO in June after joining the railroad in 1992 and working in various legal, finance and administrative positions.
Ackman said the resistance by Norfolk Southern’s board and statements that the merger can’t be done follows the same pattern that unfolded before he won a proxy vote to install Harrison as CEO of Canadian Pacific in 2012.
“I’ve seen this movie before,” Ackman said.
To alleviate regulatory concerns, Canadian Pacific said Tuesday it would use a voting trust, allowing shareholders of Norfolk, Virginia-based Norfolk Southern to receive cash and shares in a new listed company by May 1.
Norfolk Southern responded that such a plan was unlikely to gain approval by the U.S. Surface Transportation Board. The railroad on Monday released a report it commissioned from two former heads of the board who said regulators adopted stricter rules in 2001 that require railways to prove there would be a benefit to the public from a proposed merger or trust. The former members, Francis Mulvey and Charles Nottingham, agreed that a trust and a Norfolk-Canadian Pacific merger would have a difficult time meeting that standard.
Norfolk Southern also believes that if the new company were domiciled in Canada it could face regulatory issues, given the concerns around U.S. companies moving their headquarters to locations with lower tax rates, according to people familiar with the company’s thinking who asked not to be identified because the matter is private.
So-called inversion deals allow companies to merge with corporations located in countries with a lower tax bracket and move their combined headquarters there to lower their tax bill. The U.S. has a corporate tax rate of 35 percent, the highest in the developed world, and taxes companies on the sales they have abroad.
Canadian Pacific said in a presentation Tuesday that it expected the combined railway company to have a tax rate lower than 30 percent. While not technically an inversion because Norfolk would only retain a minority stake under the proposal, moving its headquarters to Canada would come at a politically charged time.
U.S. lawmakers have opposed such inversion deals after a string of such transactions in recent years, with companies including Burger King Worldwide Inc. and Pfizer Inc. either exploring or executing such deals.