Canadian Pacific expects to deliver a premium approaching 60 percent to Norfolk Southern shareholders with its cash-and-stock offer to combine the two North American railroad operators.
The Calgary, Alberta, company filled in some financial details on Wednesday for a deal it outlined broadly a day earlier. Its target, Norfolk Southern, had given its offer a lukewarm reception late Tuesday, saying that the parts - $46.72 in cash and a portion of Canadian Pacific shares - added up to a premium of less than 10 percent to Norfolk Southern's trading price.
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Shares of the Norfolk, Virginia, company closed at $86.97 on Tuesday and have climbed nearly 9 percent since media reports of a possible deal surfaced earlier this month. The stock jumped more than 6 percent Wednesday morning.
The possible deal is surfacing as railroads face pressure from the tumbling price of coal, with more utilities using natural gas. Norfolk Southern's coal revenue dropped 23 percent to $482 million during the third quarter. The company has taken roughly 300 miles of track primarily used for coal out of service over the past 18 months in response to the lower volume.
Canadian Pacific said the combined railroads could become more efficient, reap tax savings and create a transcontinental network linking major North American industrial centers, cities and ports.
Canadian Pacific said Wednesday that its offer involves cash and a portion of stock in a new company that would be created by this deal, not a slice of Canadian Pacific shares. That new company would own both railroad operators.
Canadian Pacific spokesman Martin Cej said his company has only made an offer to talk with Norfolk Southern about a deal, not a formal acquisition bid.
The company estimates that by the time a formal offer is announced in late March, the total value of the cash-stock deal will be $126.18, based on the future value of this combined company. That represents a 59 percent premium to a 45-day average closing price for Norfolk Southern's stock before the deal reports surfaced.
Norfolk Southern shareholders would hold a 41 percent stake in the new company.
"This is not a quick-and-dirty takeover," Cej said. "It is one that assumes the shareholders of Norfolk Southern would want to take part in the combined growth of the company in the future."
It also would give Canadian Pacific a significantly expanded presence in the United States. Norfolk Southern operates in 22 states and the District of Columbia.
Shares of Norfolk Southern Corp. rose 6.6 percent, or $5.77, to $92.74 Wednesday morning, while U.S. traded shares of Canadian Pacific also climbed more than 5 percent, or $7.64, to $146.22. Broader markets were up slightly.
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