According to Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl, “The addition of a contingent value right (CVR) is Canadian Pacific’s way of providing Norfolk Southern shareholders with an insurance backstop, another effort by the Canadian Class I to put its money where its mouth is.”
“As this latest offer may still not be enough to sway NS management, a proxy fight may ensue, but the prospect of BNSF throwing its hat into the ring could complicate matters further for CP,” says Seidl. “CP on Dec. 17, 2015 added 0.451 of a CVR, which will have a maximum value of $25, to its offer of $32.86 in cash and 0.451 shares of stock in the combined CP-NS company for each NS share. The CVR is designed to protect the holder’s value in the event that the value of the stock in a combined CP-NS is below $175 per share at the date of payment. 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 and $175 per share, with no payment in the event the CP-NS share price is above $175, up to a maximum value of $25 per share.
“The downside to NS shareholders from embarking on a merger with CP appears limited, but the appeal of such a deal may not be compelling enough either for shareholders to jump right on board, given that the anticipated premium will not be realized upfront and is contingent on a number of variables.
“Another important point of consideration for NS management and shareholders is recent commentary by Berkshire Hathaway-owned BNSF saying that it could consider throwing its hat into the ring. While BNSF would lack the powerful “Harrison effect” in a potential bid, NS shareholders may find a potential upfront cash premium, even if it is not very substantial, as a more-sure way to achieve a solid return.
“Warren Buffet has long been enamored with the railroad sector and has long been our pick to participate in the final round of consolidation. In a recent interview, the Executive Chairman of BNSF, Matt Rose, stated that his company has had discussions with both CSX and NS and is paying close attention to the CP/NS saga.
“If CP’s overtures toward NS come to fruition, we believe that other railroads will be forced to scramble to match the scale and product offerings of their newly formed transcontinental peer. This could push the industry from 7 Class I’s to 4.
“Conversely, the comments made by Rose may be initially intended to give notice to the Surface Transportation Board that the next merger will lead the industry into an ‘end game’ scenario.”