CP Rail board reviewing next steps after Norfolk formally rejects revised offer

MONTREAL – Canadian Pacific Railway’s board is meeting to review Norfolk Southern Railway’s formal rejection of its revised merger proposal, a company official said Monday.

The Calgary-based railway, which is conducting a regularly scheduled meeting Monday and Tuesday, declined to indicate what next steps it is considering.

In a letter dated Dec. 14, Norfolk Southern informed CP Rail (TSX:CP) that it considers the revised offer to have less value and cash than the prior proposal which is determined was “grossly inadequate.”

It added that last week’s revised offer, including an “unprecedented voting trust structure” that Norfolk Southern says will give CP “premature control” over the U.S. railway, is unlikely to be approved by the U.S. regulator.

“It is the board’s unanimous view that your proposal continues to be 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,” said a statement from Norfolk’s CEO and chairman, Jim Squires, and lead independent director Steven Leer.

CP’s revised deal would see Norfolk Southern shareholders receive $32.86 in cash and 0.451 shares of stock in the combined company — a bid Canadian Pacific characterized as a “substantially more financially attractive offer” than the original proposal of US$46.72 in cash and 0.348 of the new company.

Under the revised proposal, CP Rail chief executive Hunter Harrison would quit and sever all financial ties with Canadian Pacific to run Norfolk Southern until 2018 or 2019, when Canadian Pacific chief operating officer Keith Creel would take over to run the merged company.

The two companies would merge in the fall of 2017 after the U.S. regulator gives its approval. If the merger isn’t sanctioned, the voting trust would end and the two companies would cut ties, with Harrison remaining at the helm of Norfolk Southern.