Calgary, Canada-based railroad operator Canadian Pacific Railway Limited CP is back with a sweetened offer to buy Norfolk Southern Corporation NSC. The Norfolk, VA-based railroad company has already rejected two prior cash and stock offers from Canadian Pacific.
Norfolk Southern had stated that the earlier offers were “grossly inadequate” and significantly undervalued the company. The board had also cited significant regulatory risks as another reason for turning down the offers. 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. A long and tedious process would also significantly disrupt regular operations at the company.
According to Canadian Pacific’s latest offer, shareholders of Norfolk Southern can receive $32.86 in cash, 0.451 shares of stock in the combined entity apart from 0.451 of a contingent value right (which will have a maximum value of $25) in exchange of each of the company’s shares. A contingent value right refers to a highly liquid instrument that enables the holders to convert to cash at their discretion.
Canadian Pacific stated that the measurement period would commence on or about Apr 20, 2017 and would be of approximately 6 months’ duration. Shareholders will get their cash payment on or about Oct 25, 2017. According to Canadian Pacific, the value of the deal previously was between $37 billion and $42 billion; however, Norfolk Southern had claimed that the offers made were worth much less.
Canadian Pacific has stated that following the sweetened offer, the value of the deal would go up by approximately $3.4 billion in the scenario of a full contingent value right payout. Payment will be nil in the event of the value of the stock of the combined entity exceeding $175 at the date of payment.
Canadian Pacific has accused Norfolk Southern of misleading investors and has urged the latter’s board to consider the latest offer. Norfolk Southern will now evaluate the revised offer. We expect investor focus to remain on the issue.
Incidentally, Canadian Pacific has been looking to expand its operations for quite some time now. Last year, the company had made an unsuccessful bid to buy another railroad operator, CSX Corporation CSX.
Zacks Rank
Currently, both Canadian Pacific and Norfolk Southern carry a Zacks Rank #3 (Hold). Investors interested in the broader transportation space may consider Delta Air Lines DAL which carries a Zacks Rank #2 (Buy).
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