Jim Squires turns into toast

“I’ve seen this movie before,” investor and Canadian Pacific director Bill Ackman said in the middle of today’s conference call with securities analysts. So have I. The movie was “The Hunter & Bill Show” that he and Hunter Harrison podcast over the internet from Toronto in 2011, when Ackman was campaigning to replace CP management with the recently retired Harrison. Watching their performance then, I thought to myself that Fred Green, then the CEO of Canadian Pacific, would soon be unemployed. Just months later, Green was gone. I had that same feeling today. Norfolk Southern will not withstand the love hug it is getting from its suitor, Canadian Pacific.

You may have listened to the 150-minute webcast today and reached a different conclusion. Certainly many of you wrote on this blog that once Jim Squires, the chief executive of Norfolk Southern, roundly rejected CP’s initial offer last Thursday, the matter was settled.

Except it wasn’t settled. CP came back with a sweeter offer today, and it is one that NS shareholders will have trouble dismissing, even though Squires dismissed it within mere minutes. Here is what NS owners would get: A mix of cash and stock in the new company that CP values at $125 to $140 per NS share (which now trades at about $90). A voting trust that puts the money in the hands of NS shareholders as early as next May. An arrangement in which CP would probably be the road put into the voting trust, while Harrison moves from being chief executive of CP to the same job at NS. Harrison protégé Keith Creel, now president of CP, would become CP’s chief executive.

And now that Norfolk Southern keeps saying no? Said Ackman, who runs Pershing Square Capital Management: “If I were not on the board of CP, I would be buying stock of NS and considering putting up a slate of directors. This is an ideal activist situation. . . . A number of activists have contacted me and Hunter. [A proxy fight] is a reasonably possible event.” And Harrison ended the 150-minute event this way: “We are going to do everything we can to get this to shareholders, and if it comes to a proxy fight, then so be it.”

I said last week that Norfolk Southern’s pushback again CP was weak, namely, a pledge to bring its operating ratio from the low 70s to 65 by 2020, brought about mainly by stable coal traffic and robust growth in its intermodal business. Neither source of traffic is headed the right way today, and this hurts the credibility of NS. But let’s assume it succeeds. In that event, Citicorp’s rail analyst says he would assign a $90 value to NS shares, which is where they trade today.

The whole tone of today’s presentation and answers to questions came across to me as confident and reassuring. Even if the transaction is not approved by the Surface Transportation Board and the two railroads go their separate ways, said Ackman, the quality of NS operations would be markedly improved in the interim by Harrison, whose track record at Illinois Central, Canadian National and now Canadian Pacific is the marvel of the railroad world. Harrison said he can “have this thing humming” at NS by 2018 or 2019, “and I’ll ride off into the sunset.” My favorite Hunter sound bite: "I am not saying we have magic wands. We have applied the same formula for 22 years and we are going to stay with it until somebody comes up with a better mousetrap. Because what we do is so simple, people don't like it."

Confidence and reassurance is what Norfolk Southern shareholders are looking for. I predict that this affair won’t end in a proxy fight, because NS shareholders will soon force management to come to the table to hammer out a deal. Squires will find it hard, if not impossible, to go on the offensive. The time for dramatic countermeasures has passed. Canadian Pacific now appears to own the football.—Fred W. Frailey