Canadian Pacific: We Will Have Blood
After three refuted attempts, Canadian Pacific (CP) will continue pushing for a merger that would combine two of the largest railway companies in North America. In CP’s latest acquisition offer to Norfolk Southern (NSC) on December 16 the company sweetened its proposal with the addition of a contingent value right that provides added protection from downside risk for NSC shareholders.
Steaming ahead with the merger despite a third refusal to the December 16 offer, CP is seeking to build on its own momentum under the direction of legendary CEO Hunter Harrison who was awarded the executive leadership position after activist intervention from Bill Ackman in 2012 which led to the ousting of previous CEO Fred Green and the appointment of Ackman to the board of directors. Since Harrison has taken the reins the company has substantially improved its operating margin to an industry leading 40% and the stock price has gained 76%. Ackman, holding 9.12% of the company’s outstanding shares, continues to endorse the consolidation, voting in favor of the merger and communicating his support throughout the consolidation discussions.
Potentially proceeding with a hostile takeover, it seems Harrison is adamant about the synergies and benefits to the railroad industry. CP continues to highlight the tax efficiencies, railway operational efficiencies and asset consolidations which, if effectively integrated would create tremendous combined synergies. The addition of the CVR to CP’s proposal adds further complexity to an already complicated deal structure which currently also includes an ushering pre-merger trust, however Harrison still remains confident in CP’s ability to gain regulatory approval for the deal.
With three refutes, the risks are now mounting for CP and it is left with only two options. It can either seek a favorable opinion in the near-term from the Surface Transportation Board or seek to gain shareholder favor for a turnover of the NSC board. If shareholder favor is gained, majority shareholders can request a shareholder meeting within 120 days or alternatively CP will be required to wait another five months until the firm’s annual meeting in May to obtain the shareholder approval it needs to proceed. It appears CP will likely pursue support of NSC shareholders for the acquisition given its most recent enhancement to the deal proposal which adds an additional benefit for shareholders through the CVR. With the added CVR which reduces stakeholders’ downside risk, shareholders also receive cash and new shares in the interim trust during the deal closing process. While the added benefit for shareholders did not convince NSC’s board to approve of the acquisition it could help CP to gain the favor it needs from NSC’s shareholders.
Either way, CP is left with minimal options. Pursuing a hostile takeover will require greater investment from CP over the next few months while NSC is left to continue its turnaround plan. Ultimately, CP will still emerge as an industry leader with or without the merger with NSC however given the synergies outlined by CP in its pursuit of NSC a combination of the two companies could create unprecedented railway efficiencies for the industry.
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