Business Context and Reporting Period
This Form 6-K filing by Canadian Pacific Railway Limited (CP) and Canadian Pacific Railway Company, dated November 18, 2015, discloses the full text of a non-binding offer letter sent to Norfolk Southern Corp. (NS) on November 17, 2015. The filing aims to clarify the details of a proposed merger intended to create a transcontinental railroad and correct market misconceptions regarding the premium offered to NS shareholders.
Key Financial Metrics and Transaction Terms
The filing outlines a proposed 50% cash and 50% stock transaction. Key financial terms include:
- Cash Consideration: $46.72 per NS share.
- Stock Consideration: 0.348 shares of the new combined company per NS share.
- Ownership Stake: NS shareholders would own approximately 41% of the new entity.
- Valuation Premium: An initial 23.0% premium to NS's 45-day VWAP of $79.14. The total expected value is $126.18 per share (present value basis), representing a 59.4% premium.
- Dividends: NS shareholders would continue receiving a $0.59 quarterly dividend during regulatory review.
- Financing: A commitment of $14.2 billion from J.P. Morgan Securities LLC.
- Projected Synergies: More than $1.8 billion in annual operating synergies.
- Target Leverage: Mid-BBB credit rating with approximately 4x debt/EBITDA initially, targeting 2.5x within 2.5 years.
Material Changes and Strategic Rationale
The proposed transaction represents a material strategic shift, combining two premier railroads to form an integrated transcontinental network. The filing highlights the following strategic benefits:
- Creation of a coast-to-coast network connecting major industrial and population centers.
- Global reach through premier ports on the U.S. Gulf, Atlantic, and Pacific coasts.
- Integrated operations across at least four major rail gateways.
- Reduced dependency on volatile commodities like crude oil and thermal coal through a diversified book of business.
- Up to 45% pro forma EPS accretion with run-rate synergies.
Guidance, Outlook, and Risks
Management projects the fair value of the new company to be approximately $270.68 per share at transaction closure, assumed to occur on December 31, 2017. The proposal is subject to customary conditions, including due diligence, definitive agreements, board and shareholder approvals, and regulatory clearance from the Surface Transportation Board.
Risks and Contingencies: The filing includes extensive forward-looking statements and cautions that actual results may differ due to:
- Failure to obtain required regulatory approvals.
- Inability to agree on transaction terms or recognize financial benefits.
- General economic conditions, commodity price fluctuations, and competition.
- Operational risks including weather, derailments, and labor disputes.
- Changes in laws, regulations, and tax rates.
Investor Verification Checklist
- Verify the non-binding nature of the offer and the conditions required for consummation.
- Confirm the financing commitment details from J.P. Morgan Securities LLC.
- Monitor regulatory approval processes, specifically with the Surface Transportation Board.
- Review the assumptions used to calculate the $126.18 per share total value and the 59.4% premium.
- Assess the feasibility of achieving the projected $1.8 billion in annual operating synergies.