Following weeks of speculation, CP finally showed its hand on November 17 announcing in a statement that it has sent a letter to NS proposing a merger between the two companies that would create a "transcontinental railroad."
NS said in a statement that it would carefully consider the offer in consultation with its financial and legal advisors in the context of its own strategic plans and continuing efforts to improve strategic, financial and operational measures. However, according to Reuters, CP has failed to convince NS that its offer could receive regulatory clearance, and has offered no protection to NS shareholders if the deal is blocked.
NS says CP's offer equates to $US 46.72 and 0.348 CP shares for every NS share it owns.
CP reportedly contacted NS for the first time about the deal after a Bloomberg News report on November 9 stating that early-stage merger talks had been held. NS chief executive Mr James Squires subsequently met with CP CEO Mr Hunter Harrison in Florida last week where he said that he felt the regulatory obstacles were insurmountable, and that NS had its own plan to drive shareholder value.
CP says its proposal "would result in a company with the potential for faster earnings growth than either CP or NS could achieve on their own, all while maintaining a strong investment grade credit rating." CP argues that its offer would satisfy United States Surface Transportation Board and Canadian regulators.
It says that the new company would create capacity for all shippers without creating the need for more infrastructure. Among the new company's key innovations would be a new approach to terminal access, and an end to "bottleneck pricing" by providing shippers with the choice of where they can connect with another railway on the network, which will further enhance competition. It also hopes to relieve congestion in Chicago by channeling traffic through alternative hubs.
NS' stance is a blow for CP's largest shareholder William Ackman's activist hedgefund, Pershing Square Capital Management, with Ackman an advocate of consolidation in the North American railfreight sector. Similar talks with CSX over a merger also failed in 2014.