CP says willing to take Norfolk bid to shareholders

CHICAGO/MONTREAL/BOSTON (Reuters) - Executives of Canadian Pacific Railway CP.TO touted the benefits of the firm’s proposed bid for U.S. railroad Norfolk Southern Corp NSC.N during a call Tuesday with analysts, but made it clear they would court activist investors and shareholders to fight a proxy battle to complete the deal.

In an unusual move, the executives were joined by shareholder Bill Ackman of Pershing Square Capital Management, who said that due diligence could be completed on Canadian Pacific’s bid for the No. 4 U.S. railroad by the end of 2015.

Ackman, one of the world’s most powerful activist investors who controls $14.8 billion in assets, at times dominated the two-and-a-half-hour call with analysts. He argued the combined stock of the two companies could be worth $237 by mid 2016 and the merged company could achieve 3 percent annual revenue from 2018 onward.

“The upside, if this transaction is approved, is enormous,” said Ackman, also a CP board member.

Ackman said Canadian Pacific CEO Hunter Harrison and he have both been contacted by activists interested in a proxy fight with Norfolk Southern and both said if necessary they will take the proposed merger directly to shareholders.

One of the biggest questions facing any proposed merger between major U.S. railroads - and Canadian Pacific has significant U.S. rail holdings - is whether it would receive regulatory approval.

U.S. regulators have long been skeptical about rail mergers. Canadian National Railway's CNR.TO bid to buy Burlington Northern Santa Fe was blocked by authorities in 1999-2000.

The Canadian Pacific railyard is pictured in Port Coquitlam, British Columbia February 15, 2015. REUTERS/Ben Nelms

To alleviate regulatory concerns, CP said it was prepared to close the transaction using a voting trust.

During the call Tuesday, CP CEO Harrison said that he did not think a trust would be a “major hurdle” for approval of the deal. Harrison has a reputation as a railroad turnaround expert and has dramatically improved CP’s metrics since taking over.

CP executives and Ackman spoke to analysts after the railroad made a second bid for Norfolk Southern, of $32.86 in cash and 0.451 of a share in a new holding company that would own both Norfolk Southern and Canadian Pacific.

Norfolk Southern promptly rejected the bid and said Monday the merger was unlikely to win approval from U.S. regulators, citing a white paper by two former Surface Transportation Board commissioners that said regulatory approval would be incredibly hard to obtain.

In a statement CEO Jim Squires described the new bid as “grossly inadequate,” that Norfolk Southern had reviewed the voting trust structure and did not believe the STB would approve it.

The approval process by the STB could take up to 18 months and would require public hearings for comments for and against. On Monday, Cowen & Co released a survey saying 71 percent of rail customers oppose a merger between Canadian Pacific and Norfolk Southern.

The opposition of major rail customers would not boost the chances of the STB approving a deal.

CP said even if regulators ultimately decide that a merger will not be permitted, operational improvements will materially increased the value of Norfolk.

“We view this announcement positively as it demonstrates CP’s strong commitment to pursuing the acquisition,” Desjardins analyst Benoit Poirier said in a note to clients.

Norfolk Southern shares were down 3.8 percent to $88.08 and Canadian Pacific shares were off 2.8 percent at C$171.21.

(This version of the story was refiled to delete extraneous word in first sentence)

Additional reporting by Sneha Banerjee in Bengaluru; Editing by Ted Kerr and Chizu Nomiyama