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Canadian Pacific’s Proposed Merger Structure with Norfolk Southern

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Jan. 14 2016, Updated 7:37 a.m. ET

Merger structure

In the previous part of this series, we looked at Canadian Pacific’s (CP) revised attempt to woo Norfolk Southern (NSC) shareholders. In this part, we’ll go over CP’s proposed merger structure. CP proposed a two-stage approach to the possible business combination with NSC.

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First stage: The management change transaction

The first stage includes the creation of a voting trust structure, the closure of the transaction into a trust, and the change of management in May 2016. CP believes that a voting trust would protect NSC shareholders from uncertainty, as this transaction involves approval from the STB (Surface Transportation Board). This is a major hurdle in the deal. Following the change in management, the new entity would own 100% of NSC and CP. While Hunter Harrison would take charge of NSC as its CEO, his long-time disciple Keith Creel would run CP.

Second stage: The merger transaction

The merger transaction, subject to approval from the STB, is expected to culminate by the end of 2017. If the merger is not approved by the STB, then the new entity would spin off CP or NSC to shareholders and the companies would then trade publicly again on their respective stock exchanges. There wouldn’t be any changes on the shareholder base, as 53% of the shares would be held by former CP shareholders and 47% by NS shareholders. CP is very bullish on this deal since there have been 144 requests for the creation of a trust and all were approved by the STB.

The SPDR S&P Transportation ETF (XTN) holds 2.9% in NSC. Investors opting for indirect holdings in railroad companies can invest in the Industrial Select Sector SPDR ETF (XLI), which holds 7.8% in NSC’s peer group. This peer group includes Kansas City Southern (KSU), Canadian National Railway (CNI), Union Pacific (UNP), and CSX Corporation (CSX). In the next part, we’ll discuss the synergies proposed by CP and NSC’s contentions against it.

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