Norfolk Southern on Dec. 23, 2015 rejected Canadian Pacific’s third and most recent proposal to acquire NS. CP on Dec. 16 offered $32.86 in cash, a fixed exchange ratio of 0.451 shares in a new company that would own Canadian Pacific and Norfolk Southern, and 0.451 of a Contingent Value Right.
NS’s board, employing (as expected) essentially the same language it has used to turn down CP’s first and second offers, called CP’s third try “grossly inadequate,” creating “substantial regulatory risks and uncertainties that are highly unlikely to be overcome,” and “not in the best interest of the company and its shareholders.”
Following is the text of the letter that was sent on Dec. 23 from NS Chairman and CEO Jim Squires and Lead Director Steven Leer to CP’s CEO E. Hunter Harrison, and its Chairman of the Board, Andrew F. Reardon:
“The board of directors of Norfolk Southern has carefully reviewed your latest revised proposal, which you publicly disclosed on December 16, but have not otherwise communicated to us. That review was conducted with the assistance of our independent financial, legal and regulatory advisors. In its review, the board noted that the only change from your prior proposal was to include a Contingent Value Right (CVR).
“The board of Norfolk Southern has unanimously determined that your latest revised proposal is grossly inadequate, creates substantial regulatory risks and uncertainties that are highly unlikely to be overcome, and is not in the best interest of the Company and its shareholders. This would be the case even if the CVR had a value at the high end of the range suggested in your publicly filed presentation. In fact, our financial advisors believe that the CVR would trade at a significant discount.
“In addition, you have not addressed the significant regulatory issues that we have previously identified. We do not believe that your voting trust structure would be approved. As you know, our view reflects careful analysis by our regulatory experts and is fully supported by two former Surface Transportation Board (“STB”) Commissioners. You have a path to seek a declaratory order from the STB as to whether the voting trust structure that you proposed could work. The STB has clear, statutorily-established authority to issue declaratory orders to remove uncertainty, and there is precedent for it in the voting trust context. No involvement by Norfolk Southern is required for you to seek a declaratory order regarding the legality of putting Canadian Pacific into a voting trust under your proposed structure. Your decision not to seek an order shows a lack of confidence in your proposed structure.
“You continue to publicly declare that we are not “engaging” or “meeting” with you. There is no basis to meet until you both make a compelling offer and address the regulatory issues, which you have the ability to do by seeking a declaratory order. We also note your repeated public statements that you are not willing to increase your offer regardless of whether we were to meet.
“The Norfolk Southern board of directors is focused on protecting the interests of our shareholders. It would be inconsistent with the duties of the board to pursue a risky and uncertain offer that substantially undervalues the Company. Accordingly, the board of directors has unanimously rejected your latest revised proposal.”
CP issued a brief statement in reponse:
“Canadian Pacific is disappointed that Norfolk Southern Corp. has rejected without engaging in a dialogue CP's enhanced offer of Dec. 16 to create a truly transcontinental railroad to better serve customers and the economy. CP remains confident that a CP-NS combination would secure regulatory approval as a seamless coast-to-coast single-haul service benefits shippers, the industry and the public, and would generate tremendous shareholder value. It is apparent that neither the executive leadership at NS nor its board of directors are willing to sit down in an open and constructive dialogue about this transformational opportunity and that the interests of the NS board are not aligned with the best interests of NS shareholders. Therefore CP will review its strategic alternatives.”