Canadian Pacific Railway Ltd. chief executive officer Hunter Harrison said the company could be willing to raise its $28-billion (U.S.) takeover bid for Virginia's Norfolk Southern Corp.
"Is that our final offer? Line in the sand? No. I tried to indicate that" in a two-hour talk last week with Norfolk Southern CEO James Squires, Mr. Harrison said in his first public comments on the merger plan, at an investors' conference in Florida on Thursday afternoon.
CP has made an offer of $46.72 in cash and 0.348 of a CP share for each Norfolk Southern share in a deal that would create North America's largest railway. A spokesman for Norfolk Southern had no comment on Thursday. Earlier this week, the company said it would evaluate the offer it described as "highly conditional" with a low premium to the shares' recent trading price.
Mr. Harrison expressed frustration that he has not heard back from the company, and said he is unsure what roadblocks Norfolk Southern sees to any merger. He said he was told by the company it was most concerned about "shareholder value."
"It's hard to set the price if you don't know the conditions," he said. "It's hard to resolve some of the issues if you don't talk. If we can sit down and have a dialogue, we think we can solve most of the issues."
Mr. Harrison said CP is weighing different forms of a merger, including a holding company headed by him that would own both companies separately. It's possible that CP's chief operating officer, Keith Creel, would run Norfolk Southern while Norfolk's Mr. Squires would run CP from Calgary, Mr. Harrison said. "We're not trying to push him out, I want to make that clear," he said.
CP says combining the two companies could achieve operating savings of $1.8-billion over several years, much of which could come by mothballing 35 to 40 per cent of Norfolk Southern's locomotives and idling an unstated number of rail cars. Mr. Harrison also sees labour savings and efficiency gains by getting rid of rail yards and combining terminals.
Norfolk Southern's operating ratio, a key measure that compares costs with revenue, is an industry laggard – much as CP's was when Mr. Harrison took the helm in 2012. Since then, CP's operating ratio has improved to among the best in the business, as he slashed costs and squeezed more revenue out of each asset.
"This is not our first rodeo, and we think we can do it. It comes down to the shareholder," he said.
CP, which has long-term debt of $8.6-billion (Canadian), said it is confident it can secure financing to complete the deal.
To forestall anti-trust objections from regulators and customers, CP has proposed offering rival railways new access to the merged companies' network.
The merger proposal has been met with skepticism by most analysts, who say the U.S. Surface Transportation Board is a big hurdle to a deal. The regulator in 2000 put an end to a wave of rail consolidation by halting a merger between Canadian National Railway Co. and Burlington Northern Santa Fe.
Standard & Poor's said a CP takeover of Norfolk Southern would likely have negative implications for CP's credit rating, but no change is being made given the "substantial uncertainty regarding the approval, timing and ultimate conditions of the proposed merger."
CP last year tried and failed to buy Norfolk Southern's rival, CSX Corp. Since then, leaders of most other railways have echoed that sentiment, including Norfolk Southern's CEO. "We don't think it's a good idea and we think we have a great business plan to run this company," Mr. Squires said in April, when he was president of the company.
Mr. Harrison said he is trying to convince Norfolk Southern's shareholders that his way of running a railway will lead to richer stock prices, but he is trying to avoid pitching an offer directly to the company's investors.
"We would prefer not to be in some hostile position. We would prefer to sit down and work this out to the best of our abilities," Mr. Harrison said. "We just want to get the message to the shareholders and let them make the decision.… If the shareholders want this done, it's going to be done. If they don't, it's not. It's that simple."