Norfolk, VA-based railroad operator Norfolk Southern Corporation NSC has rejected Canadian Pacific Railway’s CP unsolicited proposal to acquire the company in a cash and stock deal, after a thorough evaluation of the offer that was made last month.
As a rationale for the rejection, the board of directors of Norfolk Southern termed the offer price of $46.72 a share in cash and 0.348 of a Canadian Pacific share for every Norfolk Southern share as “grossly inadequate” as it significantly undervalues the company. Moreover, the board also cited significant regulatory risks as another reason for turning down the over $28 billion offer. Norfolk Southern was of the opinion that the deal had very little chances of gaining regulatory approval in a review process that could well extend to two years or more. This would significantly disrupt regular operations at Norfolk Southern.
Norfolk Southern further stated that even if the deal eventually materialized after the lengthy review process, it would do so subject to multiple regulatory restrictions. This would substantially reduce the proposed benefits of the merged entity. Such restrictions are a major reason why there has been no merger or acquisition in the U.S. railroad industry for over a decade now.
We note that Canadian Pacific has been looking to expand its operations for quite some time now. Last year, Canadian Pacific had made an unsuccessful bid to buy another railroad operator, CSX Corporation CSX.
Given its constant efforts to expand, we do not expect Canadian Pacific to give up immediately, as far as its efforts to buy Norfolk Southern are concerned, given the benefits associated with the merger. Canadian Pacific might come back with a higher offer. We expect investor focus to remain on the issue.
Zacks Rank
Currently, both Canadian Pacific and Norfolk Southern carry a Zacks Rank #3 (Hold). Investors interested in the railroad space may consider USD Partners LP USDP which carries a Zacks Rank #1 (Strong Buy).
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