CP and NS appear to be locked in for a long match

In tennis, when each player (or pair) has three points, the score is known as “deuce.” That in a sense is the current score at the moment when it comes to the ongoing match between Class I rail carriers Canadian National and Norfolk Southern.

While CP has now made three offers (each close to $30 billion) for NS, which have each been turned down to date, coupled with myriad press releases, investor calls, and many opinions from many industry stakeholders debating the merits of this proposed deal, it stands to reason this could become a five-set match to say the least.

Last week, CP offered its most recent offer for $32.86 per share, 0.451 shares of stock in the combined CP-NS company, and 0.451 of a contingent value right with a a maximum value of $25.

“CP is committed to this transaction, which would create a true coast-to-coast railway that enhances competition and generates significant shareholder value,” stated a company release. “To that end, CP has added contingent value rights (CVR) to the offer, which increase the overall value of the offer and also protect the value to NS shareholders going forward.”

Not surprisingly, CP added that it is committed to this transaction, which would create a true coast-to-coast railway that enhances competition and generates significant shareholder value. The company has been very consistent in that message since this match went from rumor to reality not all that long ago.

On a December 8 conference call, CP CEO E. Hunter Harrison made his case for the rationale for making this type of acquisition.

“The rail industry came out of 2014 with a substantial amount of criticism about the lack of infrastructure and being able to handle traffic throughout North America,” he said. “We address those concerns very seriously and took a look at enhancing infrastructure and doing some things differently, and we found we were met with opposition from local communities with s NIMBY (“not in my back yard”) mentality, so as a common carrier we don’t have a choice about hauling these goods. At the same time people are opposing consolidations or merger actions, so the question becomes what do we do in the future and in the east and with additional growth if infrastructure cannot be added? As we went through those issues one of the things that quickly came up was potential consolidation.”

He explained CP could route any infrastructure and capacity east of the Mississippi River, with shareholders saying that with compelling operating and financial numbers perhaps CP should link up with an Eastern carrier, for example, and create even greater synergies to solve these issues, which led to its interest in NS, and try to engage with them and get into a dialogue with NS, which he said has no downside.

But NS has continued to return serve, in making its case for not accepting an offer, at least not yet.

And earlier this month it issued a white paper by two former STB chairmen who believe that the STB would not approve any voting trust structure because there is no basis to determine that it would be in the public interest.”

The white paper, which was written by former STB commissioners Francis Mulvey and Charles Nottingham noted that rail carriers cannot assume control of another carrier without prior STB approval.

“The STB’s approval process can last between 19 and 22 months,” they wrote. “Current STB regulations, adopted in 2001, set a high bar for approval of a proposed major merger and related voting trust based on an untested public interest standard.  In our expert opinions, the STB is not likely to approve CP’s proposed voting trust or the CP+NS merger.”

The former STB chiefs added there is every reason to expect substantial opposition to the merger from various concerns, including other railroads, shippers, labor interests, and community and environmental groups, while also citing CP’s drivers for the deal that that STB could view “with a large grain of salt.

These drivers include: Chicago congestion, which based on publicly available data they said presents limited opportunities for CP and NS to reroute traffic away from Chicago; terminal access and bottleneck proposals, with CP proposing a voluntary and unilateral open access condition to show the merger would enhance competition, with the former STB chiefs noting open access would destroy value from reduced revenues and degrade service from increasing operating complexities and costs; and improved metrics, with CP claiming it can boost NS’s operating ratio, while improved metrics can be achieved without a merger as done by CP, coupled with the dramatic reductions in NS’s network and asset base that CP has proposed to improve NS’s metrics might not be in the public interest and could also disenfranchise shippers by eliminating key service products, and compromise CP/NS ability to withstand operational or service disruptions and impair ability to sustain future traffic growth.

Opposition to the deal was also apparent in a recent shipper survey by investment firm Cowen & Company, which found that 71 percent of surveyed shippers were not in favor of a CP-NS merger.

Given the back and forth nature of this ongoing match, it is hard to say just how many sets it goes. But one thing that is clear is that it is not ending anytime too soon. Both CP and NS are heavy hitters looking to make their final points stick. Which way that goes is still a ways off, it seems.