NS rejects new CP offer as battle intensifies

OREANDA-NEWS. December 16, 2015. Eastern railroad Norfolk Southern (NS) told federal regulators today that it rejected Canadian Pacific's (CP) second acquisition offer, while CP chief executive Hunter Harrison said it might be necessary to go straight to NS shareholders to get a deal done.

NS made the rejection in a letter it sent to CP concerning the revised 7 December offer. NS included the rejection in a federal filing, saying teh second bid was worse than the first offer. According to NS it reflects a value of \\$88.52/share of NS stock.

"Nothing in the revised, reduced proposal addresses the concerns of the Norfolk Southern board arising out of our extensive review of your prior proposal," the letter from NS chief executive Jim Squires and board independent director Steven Leer says. They said there is risk that US regulators could block the transaction.

CP's revised bid offered NS \\$32.86/share in cash and 0.451 shares of the new company. 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.

NS in its letter re-iterated the conclusion it published in a 7 December white paper that the merger would not pass regulatory muster by the Surface Transportation Board (STB), which would have to approve it. NS said there are problems around definitions of bottleneck and terminal access provisions, the impact on shippers and a proposed voting trust approach. The white paper was authored by former STB members Chip Nottingham and Frank Mulvey.

Harrison in a televised interview today said NS management still refuses to talk to him, and the next 10 days will bring a lot of action on the proposal. He also did not rule out other approaches to the transaction, namely a "contingent value rights" structure in which NS shareholders would receive additional benefit if certain events occur, such as a stock price drop by a specific date. This would function as a guarantee for NS shareholders' stock position.

Harrison also said there is not much room to sweeten the offer. He said a proxy battle to oust the NS board and replace management is possible, even suggesting it might be necessary given the silence from NS management.

CP board member Bill Ackman led the successful proxy fight to oust former CP chief executive Fred Green and install Harrison at the railroad in June 2012.

Harrison also said that Berkshire Hathaway-owned BNSF, which last week publicly discussed a possible bid for NS, has been inconsistent on its positions on mergers and is not serious about such a deal.