Canadian Pacific sweetens offer to buy Norfolk Southern

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OMAHA, Neb. (AP) — Canadian Pacific is increasing its offer to buy Norfolk Southern railroad by adding a payment that would vary depending on the stock price of the new company.

Canadian Pacific CEO Hunter Harrison said Wednesday that his company remains committed to the deal despite Norfolk Southern's opposition. He wants shareholders of the Norfolk, Virginia, railroad to decide whether to pursue it.

Norfolk Southern has already rejected two previous offers from Canadian Pacific, and the two railroads have started issuing dueling news releases at every step of the process. Harrison said he still hopes to sit down and negotiate, but he is committed to the deal.

"If this is going to be a street fight, so be it," Harrison said.

Norfolk Southern said in a statement that its board will carefully review the latest offer, but noted that little had changed from the earlier offers it rejected.

Canadian Pacific said its new offer could add as much as $3.4 billion to its previous offer that it estimated was worth between $37 billion and $42 billion. That value is based on the projected value of stock in a new company that would own both railroads.

Norfolk Southern has said the previous offer was worth roughly $27 billion based on current share prices and "grossly inadequate."

In the latest offer, Canadian Pacific is offering to pay Norfolk Southern investors up to roughly $11.30 per share more if shares of the combined company are worth less than $175 in October 2017. But if the shares are worth more than $175, that payment would be reduced to zero.

One of the key questions is whether federal regulators would approve such a merger. No major railroad mergers have been completed since the Surface Transportation Board issued tough rules for them in 2001.

S&P Capital IQ analyst Jim Corridore said he thinks there is little chance that regulators will approve this deal, and he expects Norfolk Southern to reject this latest offer, so a proxy battle appears likely.

Canadian Pacific officials remain confident this deal would be approved because they have included several details designed to increase competition between railroads.

But Norfolk Southern has said it doesn't think regulators would approve the deal, so investors are better off if the railroad remains independent.

Canadian Pacific's offer has the support of board member Bill Ackman, who leads activist investment firm Pershing Square. Ackman said Wednesday that if this Norfolk Southern deal fails, Canadian Pacific will pursue other railroads.

Last fall, Canadian Pacific approached CSX railroad about a possible merger, but those talks didn't progress beyond initial discussions.

Ackman said it appears that Norfolk Southern's board is "attempting to mislead shareholders" by calling Canadian Pacific's offers "grossly inadequate."

But Stifel analyst John Larkin said the complicated offer to acquire Norfolk Southern relies on numerous assumptions that can be hard for investors to sort out.

"The bottom line is we don't think trying to confuse investors is the best way to try and push what is increasingly becoming a controversial deal," Larkin said in a research note.

Shares of Canadian Pacific Railway Ltd. gained $1.97, or 16 percent, to $126.97 in afternoon trading Wednesday. Norfolk Southern Corp. shares fell $2.08, or 2.3 percent, to $88.84.

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