BNSF says NS-CP deal could spur more mergers

OREANDA-NEWS. December 15, 2015. As eastern railroad Norfolk Southern (NS) and Canadian Pacific (CP) jockeyed this week over whether the two companies should become one, BNSF said the action would drive other railroads to merge, possibly including itself.

"If one occurs then that will likely set off another attempted combination," BNSF assistant vice president Mike Trevino told Argus, adding that a CP/NS merger would put eastern carrier CSX at a competitive disadvantage.

It is possible BNSF might also bid on NS, but the Berkshire Hathaway-owned western carrier said shippers would likely not support such a merger.

"Maybe there is a bid that comes in for NS," BNSF said. "I am not necessarily saying it would be us, but maybe. It could be somebody else."

Class I mergers would destabilize competition and the Surface Transportation Board (STB) would have to consider the ripple effect of an NS/CP merger, a deal it has to approve. Union Pacific has said it does not favor mergers in the current environment.

In a similar scenario, when Burlington Northern acquired the Santa Fe Railway in late 1996 to form BNSF, other railroads tried to step in and make bids. In 2000, when BNSF proposed to combine with Canadian National, the STB placed a 15-month moratorium on railroad mergers to preserve competition.

CP ups its offer for NS

CP on 8 December sweetened its merger offer for NS and laid out its case to investors in a conference call.

NS quickly denounced the new offer, saying it represented a reduced price from CP's initial offer last month.

The major changes to CP's offer include mechanisms to get cash to shareholders faster and a plan to give NS and its owners a larger share of the combined entity.

CP board member Bill Ackman, who led the successful proxy fight to oust former CP chief executive Fred Green and install current chief executive Hunter Harrison, said NS shareholders will receive value of \\$125-140/share, depending on whether STB approves it.

That figure is above the \\$90/share estimated fair-market value for NS stock based on NS chief executive James Squires' stated plan for the company, Ackman said. NS stock closed at \\$89.44/share today.

He said the arguments the eastern railroad is presenting to its shareholders are the same he encountered in the CP battle, and that shareholders should reject them.

CP offered NS \\$32.86/share in cash and 0.451 shares of the new company, an offer quickly knocked down by NS management as a reduction from the initial proposal that the NS board unanimously rejected.

The original offer included \\$46.72/share in cash and 0.348 shares of the new company. The added stock component allows NS shareholders to hold 47pc ownership in the new company, up from 41pc in the initial proposal.

CP said the proposal would likely place CP into a voting trust, instead of NS, to ease the transition for the eastern railroad and that CP plans to present its plans directly to NS shareholders to seek their consent. CP also hopes large shareholders will pressure NS board and management to consummate the deal.