Frank Wilner – CP-NS: Voting trust and other conundrums

November 30, 2015

Levitation takes two forms among railroads—magnetic levitation relating to futuristic high-speed passenger transport, and stock levitation associated with bidding wars for asset control.Website Insert Perfect Answer copy

Stock levitation most recently was seen in 1997 when Conrail shares ascended within months from $85 to $115 during a bidding war involving CSX and Norfolk Southern (NS). It ended only after Surface Transportation Board (STB) Chairman Linda Morgan sent CSX and NS a message via Washington Post journalist Don Phillips that if they didn’t mutually agree on splitting Conrail assets, the STB would impose a third-party settlement neither might like.

Comes now the possibility of a new bidding war—for control of NS in the wake of Canadian Pacific’s (CP) initially unwelcome $28.4 billion solicitation offer called “too low” by NS. A previous unsolicited bid by CP for CSX was rebuffed by CSX management last year and then abandoned by CP amidst cost anxieties and festering concerns of rail congestion and service problems that made rail merger mavens chary.

Since, rail service-problem fears have faded while NS stock slid some 30% in price, with NS suffering worse traffic losses than its rivals. All this reenergized the still marriage-minded 71-year-old CP chief Hunter Harrison, who thirsts to create North America’s first transcontinental railroad.

As “no” rarely is heard as “no” among railroad CEOs whose testosterone levels soar when the word “merger” is uttered and a prey’s stock price is considered attractive, NS is now assumed “in heat.” In such an environment, CP best beware of another railroad, a rail holding company such as Berkshire Hathaway, or a non-railroad hedge fund entering the fray with higher offers.

Thus, CP is prepared to improve its bid to achieve—more certainly, more quickly and less expensively—a lock-up of a majority of NS shares so as to shut out other NS suitors pending a subsequent STB decision on a CP-NS merger application. As one Class I railroad may not exert operational control over another Class I railroad absent formal STB merger approval, the tendered NS shares would be placed in a voting trust pending regulatory finality.

A voting trust for railroads requires STB approval, which typically occurs in fewer than two months following a request. A subsequent decision on whether to permit a CP-NS merger could stretch more than a year, but no longer than 16 months, per statute, following filing of a formal merger application.

Requisite regulatory hurdles are significant and not confined to CP and NS. Responsive and inconsistent merger applications may follow a CP-NS merger submission. Kansas City Southern could seek inclusion as a condition of merger; other railroads might press for concessions such as line sales; while BNSF might make a play on CN, and Union Pacific one on CSX. Other permutations are possible.

Adding to the fog is that the top institutional shareholders of the major U.S. railroads, whose concurrence in any merger deal is essential, are largely the same—Capital Research, Vanguard Group, State Street Corp. and Black Rock Investment Trust.

Read Railway Age Contributing Editor Frank N. Wilner’s full analysis by clicking here.

 

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