Norfolk has now rejected three proposals from Canadian Pacific, the most recent coming on December 23 with a reported value in the $30 billion range. All three of the proposals were met with the same response from Norfolk–the offers were “grossly inadequate.”
Norfolk even when a step further and addressed a letter to Canadian Pacific CEO Hunter Harrison and Chairman Andrew Reardon: “There is no basis to meet until you … make a compelling offer and address the regulatory issues.”
Those regulatory issues stem from the belief by many in the industry that a railway merger, which hasn’t occurred in 15 years, is unlikely to get the blessing required from regulatory bodies on both sides of the border, specifically the Surface Transportation Board.
What’s next for Canadian Pacific and this merger?
What is becoming increasingly apparent is that if Canadian Pacific still truly wants Norfolk, the company may need to go down to a proxy fight. Canadian Pacific has already appealed to Norfolk’s stockholders. If the perceived value in the deal, or the loss of not doing a deal, is significant enough, that may push the tide in Canadian Pacific’s direction.
The deal could spell lucrative revenues and efficiency improvements for both companies with some estimates putting the savings at upwards of $1.8 billion. But it’s important to note that the deal, however it may pan out, is not the only possibility for either company.
BNSF Railway Co., another railway operator that is waiting on the sidelines, has also expressed interest in acquiring Norfolk through a competing bid. For Canadian Pacific, focus may return back to CSX Corp., another railroad that the company was considering merging with back in 2014.
The real loser in the waiting game will be Norfolk and its shareholders. The continued attempts and subsequent rejections by Canadian Pacific have made the share price of Norfolk tumble from a peak of US$97 (when the first meeting between the companies was called in November) to the current price just above US$72.
Canadian Pacific, on the other hand, is trading just under $153, fairly close to the 52-week low of $149.42 that the company recently dipped to, but has since crept upwards. Analysts still maintain a strong rating on the stock; price targets are currently set around $215.
In my opinion, Canadian Pacific remains one of the best opportunities on the market for an investor looking to diversify and add a railway to their portfolio. The work that has been done to turn the company around and become leaner and more efficient not only set an example for the rest of the industry, but is likely to continue into this year, irrespective of whether there’s a merger or not.