Canadian Pacific sweetens its offer for Norfolk Southern

Canadian Pacific has sweetened its offer for Norfolk Southern railroad adding a payment component that would vary depending on the stock price of the new company.

According to Canadian Pacific CEO Hunter Harrison, his company remained committed to the deal despite Norfolk Southern's opposition and wants Norfolk shareholders to decide whether to pursue it.

Norfolk Southern has already rejected two previous offers from Canadian Pacific, and the two railroads had started putting their version in public statements. Norfolk Southern rejected Canadian Pacific's first merger proposal last month and a revised offer last week.

According to Harrison, he still hoped to sit down and negotiate, but he was committed to the acquisition.

''If this is going to be a street fight, so be it,'' AP quoted Harrison.

Norfolk Southern said in a statement that its board would carefully review the latest offer, noting however, that little had changed from the offers it had previously rejected.

According to Canadian Pacific, its new offer could add as much as $3.4 billion to its previous offer that it estimated to be worth between $37 billion and $42 billion.

That value was the projected value of stock in a new company that would own both railroads.

According to Norfolk Southern, the previous offer was worth roughly $27 billion based on current share prices and ''grossly inadequate.''

In the latest offer, Canadian Pacific was offering  Norfolk Southern investors roughly $11.30 per share more if shares of the combined company was worth less than $175 in October 2017.

However, if the shares were worth more than $175, that payment would be reduced to zero.

Canadian Pacific yesterday offered Norfolk Southern shareholders the opportunity to receive for each share of NS $32.86 in cash, 0.451 shares of stock in the combined Canadian Pacific-Norfolk Southern and 0.451 of a contingent value right, which would have a maximum value of $25.

Canadian Pacific said is committed to this transaction, which would create a true coast-to-coast railway that enhances competition and generates significant shareholder value.

To that end, Canadian Pacific said, it 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. 

A CVR is a highly liquid instrument that gives holders the ability to convert to cash at their discretion. This particular CVR protects the holder's value in the event that the value of the stock in a combined Canadian Pacific-Norfolk Southern is below $175 a share at the date of payment.

Each CVR would entitle the holder to receive a cash payment from Canadian Pacific equal to the difference between the Canadian Pacific-Norfolk Southern share price during the relevant measurement period and $175 per share (with no payment in the event Canadian Pacific-Norfolk Southern share price is above $175), up to a maximum value of $25 a share.

Under the Canadian Pacific proposal, the measurement period would begin on or around 20 April, 2017, and would end on or around 20 October 2017 with shareholders receiving their cash payment on or about 25 October 2017. 

In the event of a full CVR payout, the total cash payment would represent an additional $3.4 billion and Canadian Pacific is confident it would maintain an investment grade rating.