OMAHA, Neb. (AP) — Norfolk Southern rejected Canadian Pacific's latest takeover offer less than an hour after it was announced Tuesday, but the Canadian railroad now appears ready to take its case directly to the shareholders of its rival.
The new offer includes $32.86 cash and 0.451 shares in the combined company that would own both railroads.
That includes less cash than the initial offer of $46.72 per share, but more equity than last month's offer of 0.348 shares in the combined company. Norfolk Southern shareholders would own 47 percent of the new company under the latest offer, up from 41 percent initially.
The new bid also promises that Norfolk Southern shareholders could receive the cash next spring before federal regulators complete their review, which might take roughly two years.
The two railroads don't agree on how to value the shares in the new company. Canadian Pacific estimates the offer should be worth between $125 and $140 a share at closing next May, but Norfolk Southern says the value is closer to $91.62 per share.
"Canadian Pacific's revised, reduced proposal is not only less than what the Norfolk Southern board has already found to be grossly inadequate, it is even more uncertain and risky given the decrease in the cash consideration," Norfolk Southern Chairman, CEO and President Jim Squires said.
But Canadian Pacific executives and board member Bill Ackman, who leads activist investment firm Pershing Square, said Tuesday they see little downside in trying to combine the two railroads.
They have predicted roughly $1.8 billion in annual cost savings if the railroads are merged, and while the deal is being reviewed Canadian Pacific CEO Hunter Harrison would likely become Norfolk Southern CEO and start making operational changes.
"Most of the synergies come from improving the Norfolk Southern railroad, and those happen regardless of whether the merger is ultimately approved," Ackman said.
Shares of Norfolk Southern Corp., based in Norfolk, Virginia, shed $5.20, or 5.7 percent, to $86.32. Canadian Pacific Railway Ltd.'s stock also declined, falling to $126.13, down $4.35, or 3.3 percent.
Federal regulators haven't approved any major railroad mergers in more than 15 years since adopting tough restrictions on them in 2001. One of the only major deals in recent years is when Warren Buffett's Berkshire Hathaway conglomerate bought BNSF railroad in 2010.
Norfolk Southern officials said they doubt whether the Surface Transportation Board would approve this merger. So the railroad consulted two former STB commissioners who predicted that concerns about competition and the structure of the proposal would doom this deal.
Squires has said he believes investors will be better off if Norfolk Southern remains an independent railroad and improves its operations.
Harrison said he still hopes Norfolk Southern officials will sit down to negotiate, so they can find a way to address both railroads' concerns.
But Canadian Pacific officials are meeting privately with Norfolk Southern shareholders to address their questions, and Harrison said his railroad will consider pursuing a hostile takeover so shareholders can decide whether to pursue the deal.
Citi analyst Christian Wetherbee said it appears Canadian Pacific will have to adopt more aggressive tactics to pursue this deal because Norfolk Southern seems unlikely to change its opinion that regulators won't approve a deal.
Edward Jones analyst Logan Purk agreed that a hostile takeover is looking more likely at this stage, but any deal will face tough scrutiny from regulators who want any transaction to enhance competition.