CP could boost Norfolk Southern offer: analyst

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Activist investor Bill Ackman will join Canadian Pacific Railway Ltd.'s chief Hunter Harrison on a conference call on Tuesday to discuss the company's takeover attempt of Norfolk Southern Corp.

The inclusion of Mr. Ackman, a CP board member and – through hedge fund Pershing Square Capital – a 9-per-cent owner of CP, is believed to be a sign the company is not about to abandon pursuit of Virginia-based Norfolk Southern.

CP last month offered $46.72 (U.S.) in cash and 0.348 in CP shares for the company, which is worth about $92 a share. Norfolk Southern shares traded at about the same price midday on Monday.

Citi research analyst Christian Wetherbee said he expects CP will raise its offer to $100 and offer new details of the voting trust structure it plans to use to take ownership of Norfolk Southern ahead of a regulatory approval process that could take two years.

The target has rebuffed CP's approach, saying the $28-billion offer is too low, and that the regulatory hurdles are too high, at any price. Norfolk Southern also rejected CP's claims the merged companies would be able to ease congestion in the key Chicago hub.

Mr. Wetherbee said the voting trust structure could see Mr. Harrison take the chief operating officer's job under current Norfolk Southern CEO Jim Squires. He pointed to the 1998 merger of Illinois Central and Canadian National Railway Co. when Mr. Harrison, then CEO of the U.S. railway, became the COO of CN while Illinois Central was put in trust. That merger gave CN a network some say is North America's best, with access to three coasts.

"[I]t seems increasingly likely that the deal will need to transition to a hostile offer or an activist campaign designed to replace NS's board. This likely extends the process for some time, potentially through a spring NS shareholders meeting. Given our discussions with NS shareholders we believe a proxy contest has a reasonably good likelihood of being successful," Mr. Wetherbee said in a research note.

Mr. Harrison has been credited with turning around three major railways, and says he could do the same at Norfolk Southern, a company whose performance has lagged those of its peers.

He is already having an effect on Norfolk Southern. The company last week issued its first financial forecast, an attempt to convince unhappy investors to wait for its new management team to improve the company's fortunes.

But working against Mr. Squires and his assurances is the weak industrial demand that has hammered rail freight volumes, not to mention the attraction for investors of the prospect of a new leader with a track record of boosting shareholder value.

"We foresee a short tenure for [Norfolk Southern] management unless the team is successful in delivering swift positive change," Barclays Bank said in a note to clients on Monday.