CP Drops Possible Proxy Fight as It Pursues Norfolk Southern

  • Ackman-backed carrier to seek investor resolution for takeover
  • Change in tack is almost a 'proxy-light' move, analyst says

Canadian Pacific Railway Ltd. will ask Norfolk Southern Corp. shareholders to pressure the U.S. railroad into starting merger talks, dropping plans for a proxy fight.

Canada’s second-largest railroad said it plans to submit a resolution to Norfolk Southern investors requesting that the board “engage in good faith discussions.” Norfolk Southern has rejected several approaches, including one in December that valued the U.S. company at $27 billion. The Calgary-based carrier won’t present an alternative slate of directors at Norfolk Southern’s 2016 annual meeting.

“We are simply asking them to vote in favor of having their board talk to us,” Chief Executive Officer Hunter Harrison said in a statement Tuesday. “We continue to believe in the potential to create a transcontinental railroad with NS and believe this is a fair and measured approach to getting a deal done.”

The acquisition would allow Harrison to create a coast-to-coast railroad that eliminates rail-car exchanges between the carriers and would enable him to apply his efficiency expertise to Norfolk Southern, which lags behind other large carriers in key service measures.

Canadian Pacific said that although some Norfolk Southern investors asked to nominate an alternative slate of directors, “this shareholder resolution is the clearest, fairest approach to a process that will result in an outcome beneficial to all stakeholders.”

Norfolk Southern rejected the call for more talks in a statement, saying its board had already turned down CP’s offers as “grossly inadequate.” The U.S. railroad reiterated concerns that the Surface Transportation Board, which approves mergers, would block the combination or modify regulations to the detriment of the railroad. CP hasn’t sought to clarify the likelihood of approval with the regulator, Norfolk Southern said.

“We believe further discussions are not in the best interests of NS shareholders unless CP offers NS shareholders compelling value and addresses the regulatory issues inherent in its proposal,” Norfolk Southern said in the statement.

‘Proxy Light’

“Appealing directly to shareholders this way is almost a ‘proxy-light’ move,” said Logan Purk, an analyst at Edward Jones & Co. “It seems like they are trying to turn over every stone and keep the proxy in their back pocket, hoping they don’t have to use it.”

Norfolk Southern rose 1.3 percent to close at $71.42 in New York, while Canadian Pacific climbed 1.8 percent to C$172.54 in Toronto.

Activist investor Bill Ackman, whose Pershing Square Capital Management is Canadian Pacific’s second-largest investor, said on a conference call on Dec. 16 that the easiest way forward would be to submit a resolution urging Norfolk Southern’s board to sit down with Canadian Pacific management to discuss a possible merger.

“I think shareholders would overwhelmingly approve that resolution,” Ackman said at the time. The investor and Canadian Pacific hadn’t ruled out a proxy fight at that point. Such a move, including nominating directors, was the “more aggressive way,” he said.

Proxy Deadline

The deadline to submit proxy materials or shareholder proposals for Norfolk Southern’s annual general meeting is Feb. 14, according to the company’s website.

The U.S. Surface Transportation Board has received dozens of comments on the potential deal from various stakeholders, including shipping customers, other railroads and lawmakers. Some shippers have expressed support for a merger, while a majority of the submissions have said further rail consolidation would hurt competition.

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