Canadian Pacific (CP) on Dec. 16, 2015 announced a “revised, enhanced offer” in its bid to acquire Norfolk Southern (NS). The revised offer consists of, for each NS share, U.S.$32.86, 0.451 shares of stock in the combined CP-NS, and 0.451 of a contingent value right (CVR) worth a maximum $25. In response, NS said its board of directors “will carefully consider the publicly disclosed, revised proposal from CP with the assistance of its financial, legal and regulatory advisors.”
A CVR, CP said, “can be viewed as a liquid security that can be sold by NS shareholders and converted to cash at or after the transaction closes in May 2016. Each CVR would entitle the holder to receive a cash payment from CP equal to the difference between the CP-NS share price during the relevant measurement period, which would be from April 20, 2017 to Oct. 20, 2017, and $175/share (with no payment in the event CP-NS share price is above US$175/share), up to a maximum of $25/CVR. CVR holders would receive cash payment on Oct. 25, 2017 (T+3 settlement) of up to $3.4 billion.”
CP said its revised offer and CVR issuance “reflects CP’s confidence in the ultimate value of the transaction” and “represents a 61% to 78% premium to the undisturbed NS share price, based on our estimates for the intrinsic value of CP-NS.” It “represents approximately $10 per NS share of additional consideration based on the current trading price of CP, provides insurance on the ultimate trading value of CP-NS stock.” The CVR, CP added, “will be a highly liquid, easy-to-value security. In light of the expected CP-NS trading price in 2017, we expect payout under the CVR is unlikely. CP-NS will be able to finance any potential payment under the CVR on 10/25/17 with additional borrowings while maintaining its investment-grade credit rating, with 2017 estimated debt/EBITDA increasing from 2.8x to 3.2x at maximum payout.”
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NS noted that CP’s latest, revised proposal, “other than the addition of a CVR, did not change any of the terms of the prior, reduced proposal dated Dec. 7, 2015 that was previously unanimously rejected by the NS board, and did not address the substantial regulatory risks and uncertainties inherent in the proposed combination. As [we] previously stated, if CP is confident that its proposed voting trust structure works, CP can seek a declaratory order to that effect from the STB now. The STB has clear, statutorily established authority to issue declaratory orders to remove uncertainty, and there is precedent for it doing so in the voting trust context.”