No deal?

Norfolk Southern continues to reject merger offers, but could a proxy fight be on the way?

Published January 28, 2016 by Jack Cooksey

Three times was not the charm for a Canadian company that attempted to woo Norfolk Southern Corp. into a merger late last year.

But the chase, by Canadian Pacific Railway Ltd., is still on. According to industry insiders, the endgame could come in May at Norfolk Southern’s annual meeting, or even earlier, with one source speculating that the Norfolk-based transportation company could see a takeover attempt from its shareholder ranks engineered by Canadian Pacific’s largest stakeholder, billionaire investor Bill Ackman and his Pershing Square Capital Management group. 

In the meantime, Norfolk Southern is reaching out to investors with a new five-year restructuring plan that includes staff reductions, and a message that the regulatory hurdles to such a merger are high.   

In January, weeks after Norfolk Southern’s board rejected a third unsolicited bid on Dec. 23 of $27 billion, the likelihood of a merger between the companies appeared increasingly dim. 

Jim McClellan, a 40-plus-year veteran of the railroad industry, assessed the situation this way: “I do not think there’s a snowball’s chance in hell that the merger will go through.”

McClellan, a former senior vice president with Norfolk Southern and now a vice president of Woodside Consulting in Virginia Beach, added, however, that he could see Ackman trying to sway Norfolk Southern’s shareholders to replace board members and ultimately replace CEO James Squires with Canadian Pacific’s  CEO, E. Hunter Harrison Jr.

Another rail and shipping expert, retired consultant Jim Hanscom, says Norfolk Southern’s shareholders may be enticed by the case that the Canadian company could tighten the U. S. railroad’s operations and cost structure. He believes the company could appear vulnerable in the play for a takeover.

“It does seem like they’ve been slow at the switch for a long time,” Hanscom says of Norfolk Southern, “and their metrics for how they have run the railroad have not held up for a while.”

Canadian Pacific could put forth a financial plan that shows a big payoff to investors, Hanscom says. “If you’re a shareholder, there is an appeal there.”

With a contraction in the coal industry squeezing freight carriers, Norfolk Southern has put a keener focus on reducing costs and honing its operations. On Jan. 27,  the company reported that its fourth-quarter profit dropped 29 percent, with net income of $361 million, or $1.20 a share, down from $511 million, or $1.64 a share, a year earlier.  In a conference call with analysts, Jim Squires, Norfolk Southern’s chairman, president and CEO, said the company plans to cut 2,000 jobs by 2020, including 1,200 this year, through attrition and furloughs. The plan is expected to cut costs by $130 million in 2016 and result in annual savings of $650 million by 2020. 

McClellan and Hanscom both predict that a new Harrison regime could come with a deep impact on Norfolk Southern through severe cost cutting. McClellan describes Harrison as “very aggressive and very smart, but not a long-term thinker. He would hurt Norfolk Southern and strip the capabilities.”

Meanwhile, representatives for both railroad companies aren’t talking. They declined to comment for this story beyond press statements released on Dec. 23.

Canadian Pacific did release a white paper in January restating its case for merging with Norfolk Southern. Many letters of opposition have been sent to the U. S. Surface Transportation Board, the federal agency with oversight over railroad mergers. Everyone from railroad shippers to manufacturing associations, the West Virginia Coal Association and elected officials have weighed in. They say the deal poses too much regulatory risk and would reduce competition.

In Virginia, Gov. Terry McAuliffe and the state’s congressional delegation, including Sens. Tim Kaine and Mark Warner and 10 of Virginia’s 11 members of the House, are against the proposal.