Norfolk Southern Corporation · NYSE:NSC
Norfolk Southern — Merger or Acquisition (December 2015)
47 slides from Norfolk Southern's merger presentation, Dec 9, 2015
Slide 1: CP's Value Proposition
CP’S VALUE PROPOSITION DECEMBER 8, 2015 CP
Slide 2: Forward Looking Statements
FORWARD LOOKING STATEMENTS This communication contains certain forward-looking information within the meaning of applicable securities laws relating, but not limited, to Canadian Pacific Railway Limited’s (“CP”) proposal to Norfolk Southern Corporation (“NS”) regarding a possible business combinatio
Slide 3: Additional Important Information
ADDITIONAL IMPORTANT INFORMATION This communication is neither an offer to purchase or exchange nor a solicitation of an offer to sell securities. This communication relates to a proposed business combination between CP and NS. Subject to future developments, additional documents regarding the propo
Slide 4: Note on Non GAAP Measures
NOTE ON NON GAAP MEASURES Except where noted, all figures are in millions of Canadian dollars. Financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), unless otherwise noted. CP presents non-GAAP earnings information
Slide 5: E. Hunter Harrison, Chief Executive Officer
E. HUNTER HARRISON CHIEF EXECUTIVE OFFICER CP 8957 8957 CP
Slide 6: Mark Erceg, EVP & Chief Financial Officer
MARK ERCEG EVP & CHIEF FINANCIAL OFFICER CP
Slide 7: CP's Revised Offer
CP’S REVISED OFFER Initial Offer 0.348 shares in new company US$46.72 in cash on Dec 31, 2017 Merger closing upon STB approval Dec 31, 2017 59% premium to unaffected price of $79.14 New Offer 0.451 shares in new company US$32.86 in cash in May 2016 Closing into trust in May 2016 77% premium to unaff
Slide 8: Substantial Value Creation
SUBSTANTIAL VALUE CREATION US$1.8B Support functions $270M Revenue $225M Workforce productivity $550M Fuel $100M Train productivity $230M Locomotive productivity $380M PRE-MERGER OPERATIONAL IMPROVEMENTS (72%) Commencing upon trust approval: Fuel efficiency improvement Velocity improvement Improved
Slide 9: More Diversified Book of Business
MORE DIVERSIFIED BOOK OF BUSINESS Canadian Pacific Crude, 7% Automotive, 6% Chemicals, 19% Metals/construction 11% Paper/clay/forest 3% Intermodal 21% Coal - Metallurgical 9% Coal - Thermal 1% Agriculture / Consumer 23% Total = US$5B + Norfolk Southern Crude, 6% Automotive, 9% Chemicals, 10% Metals/
Slide 10: Rapid Deleveraging from Strong Free Cash Flow Generation
RAPID DELEVERAGING FROM STRONG FREE CASH FLOW GENERATION Total adj1. debt (US$B) $27 $25 $24 $21 $19 $17 5/1/2016 2016 2017 2018 2019 2020 PF BITDA (US$B) $6.7 $7.4 $8.3 $9.2 $9.9 $10.4 PF leverage1 4.0x 3.4x 2.8x 2.3x 1.9x 1.6x 5/1/2016 2016 2017 2018 2019 2020 At trust closure, CP-NS would have BB
Slide 11: Paul Guthrie, Special Counsel to the CEO
PAUL GUTHRIE SPECIAL COUNSEL TO THE CEO CP
Slide 12: STB Criteria for Voting Trust Approval
STB CRITERIA FOR VOTING TRUST APPROVAL 1) Insulation from unlawful control violation Independent trustee would be appointed to oversee either CP or NS while in trust Whether CP or NS is in trust, Mr. Harrison will be CEO of NS and sever all economic and other ties to CP including stock and pension 2
Slide 13: STB Trust Approval
STB TRUST APPROVAL Registration Statement declared effective & Joint Proxy Statement/Prospectus mailed to stockholders Shareholder votes at special meetings to approve merger1 Close into Trust2: Provide shareholders with shares in New Public Company & cash New Public Company starts trading on TSX &
Slide 14: STB Merger Approval Timeline
STB MERGER APPROVAL TIMELINE Timeline assumes the maximum time allowed by law for final STB Approval File merger Application application accepted January 1, 2016 May 1, 2016 June 1, 2016 June 1, 2017 September 1, 2017 October 1, 2017 File Notice of Intent Evidentiary period up to 12 months Decision
Slide 15: Voting Trust Precedent
VOTING TRUST PRECEDENT The CN-IC Example (1999) Hunter Harrison resigned from IC and joined CN as COO IC held in voting trust pending STB approval Operational improvements began upon Mr. Harrison’s arrival Transaction approved; trust dissolved Five-year oversight period shortened due to successful i
Slide 16: Exceeding the Public Interest Standard for Mergers
EXCEEDING THE PUBLIC INTEREST STANDARD FOR MERGERS “…substantial and demonstrable gains in important public benefits” - 49 CFR 1180.1 (a) –(c) Service and safety improvements Efficient, reliable single-line service Eases Chicago congestion Substantial economic and environmental benefits Increases eq
Slide 17: James Clements, VP Strategic Planning and Transportation Services
JAMES CLEMENTS VP STATEGIC PLANNING AND TRANSPORTATION SERVICES CP
Slide 18: Enhanced Competition: Bottleneck Pricing
ENHANCED COMPETITION: BOTTLENECK PRICING In order to provide alternatives to shippers and secure regulatory approval: CP will not use the “bottleneck approach” when quoting rates and will instead quote rates to which gateway the shipper requests oBottleneck pricing allows an originating railroad to
Slide 19: Enhanced Competition: Modified Terminal Access
In order to provide alternatives to shippers and enhance competition: CP will allow another railroad access to CP served shippers in terminal areas when service is not adequate and/or rates are non-competitive ENHANCED COMPETITION: MODIFIED TERMINAL ACCESS Source: Adapted from U.S. General Accountin
Slide 20: Keith Creel, President & Chief Operating Officer
KEITH CREEL PRESIDENT & CHIEF OPERATING OFFICER
Slide 21: NS Has Said...
NS HAS SAID…. “CP’s operating model would drive away serviceoriented, truck-competitive traffic …“ “the proposed transaction would cause more, not less rail traffic for Chicago” “open access would adversely impact NS” “Canadian Pacific’s plan here is to really cut to the bone on costs” “the proposed
Slide 22: A Proven Model with Sustainable Results
1,104 1,148 1,236 1,449 ~1,500 2011 2012 2013 2014 2015E Capital Expenditures (C$, millions) -724 93 530 725 >900 2011 2012 2013 2014 YTD Free Cash(1) (C$, millions) C$1.6B turnaround 81.3 77.0 69.9 64.7 ~61 2011 2012 2013 2014 2015E Adjusted Operating Ratio(1) (percent) A PROVEN MODEL WITH SUSTAINA
Slide 23: The Chicago Opportunity
THE CHICAGO OPPORTUNITY Chicago handoffs reduced by: Increased single-line transit moves Lower dependency on Belt carriers Alternate gateways for interchange Re-routing around Chicago Increased supply chain reliability for existing customers Frees up capacity for the industry in capacity constrained
Slide 24: An Investor Perspective: Pershing Square Capital Management
An Investor Perspective Pershing Square Capital Management, L.P.
Slide 25: Disclaimer: Forward Looking Statements
Disclaimer Forward Looking Statements This communication contains certain forward-looking information within the meaning of applicable securities laws relating, but not limited, to Canadian Pacific Railway Limited’s (“CP”) proposal to Norfolk Southern Corporation (“NS”) regarding a possible business
Slide 26: Disclaimer: Additional Important Information
Disclaimer Additional Important Information This communication relates to a proposed business combination between CP and NS. The analyses and conclusions contained in this presentation with respect to NS are based on publicly available information. Pershing Square recognizes that there may be nonpub
Slide 27: NS Shareholders Have Two Fundamentally Different Paths Forward
Norfolk Southern (“NS”) Shareholders Have Two Fundamentally Different Paths Forward Today Mid-2016 12/31/17 2018-2019 NS New Spinoff Standalone CP or Plan NS to Trust not share-Pursue approved holders merger No STB with CP Trust HH CEO Approval approved of NS STB Approval 1 NS share = $32.86 in cash
Slide 28: The CP Offer Creates Vastly More Value with Lower Risk
The CP Offer Creates Vastly More Value for Shareholders with Lower Risk Fair Value per NS Share as of mid-2016(2) Pursue the New $90/share? Standalone 14% premium Plan to unaffected; 1.7% discount to 12/7/15 close Unaffected Merge with Share Price: CP; trust (1) No STB CP & NS CP $125/share $79.14 c
Slide 29: NS Has Announced a New Plan to Improve Performance
In Response to the CP Offer, NS Has Announced a New Plan to Improve Performance In response to CP’s acquisition offer, NS management has initiated medium-term guidance that calls for a 65% OR by 2020 NS has not historically issued medium- or long-term guidance Investors and analysts are understandab
Slide 30: Norfolk Southern's Long-Term Track Record
Norfolk Southern’s Long-Term Track Record Norfolk Southern’s operating ratio has stagnated in the low-70s% over the last decade, deteriorating from second best in the industry to last Operating Ratio by Year 85% CP NSC CNR CSX UNP BNSF 80% KSU 75% 70% 65% 60% 55% 2006 2007 2008 2009 2010 2011 2012 2
Slide 31: NS New Standalone Plan Value of ~$90 per Share
NS New Standalone Plan Value of ~$90 per Share Only If the New Targets are Achieved Even assuming NS can hit its new medium-term targets, the New Standalone Plan yields a fair value of only ~$90 per share according to analyst estimates “Based on our math, NS’ target for a sub-65% OR in 2020 was larg
Slide 32: Majority of Value Creation Not Conditioned on Merger Approval
The Substantial Majority of Value Creation from CP’s Offer is Not Conditioned on Merger Approval The substantial majority of value creation is driven by management change, not corporate consolidation The Pre-Merger Operational Improvements will be achieved whether or not the merger is approved or co
Slide 33: Approval of the Merger Would Provide Substantial Public Benefits
Approval of the Merger Would Provide Substantial Benefits to the Public as Outlined by CP NS claims that onerous conditions required by the STB would reduce the value of the stock consideration: “Even if the proposed combination were ultimately to be cleared, it would be subject to a wide range of o
Slide 34: CP's Offer and Management Create More Value with Lower Risk
CP’s Offer and Management Create Substantially More Value with Lower Risk Upfront Fair Value Total Value Track (1) (1) CEO Cash of Equity per Share(1) Record $0 ~$90 ~$90 Squires Unproven New Standalone Plan 1 share of NS $32.86 ~$92 ~$125 KC at CP Excellent 0.451 shares HH at NS of CP-NS No STB App
Slide 35: Proper Methodology for Valuing the Proposed Transaction
Proper Methodology for Valuing the Proposed Transaction Valued on an unaffected basis, this transaction is a merger between a US$23bn market cap company, CP, and a US$24bn market cap company, NS(1) For each NS share, shareholders will receive 0.451 shares of a new company, CP-NS (NS shareholders wil
Slide 36: How We Value the Transaction
How We Value the Transaction Our valuation of CP-NS is based on the following assumptions, which we believe to be conservative Base revenue growth Consensus estimates through 2018 Revenue growth of 3% for CP and NS beyond 2018, excluding revenue synergies if merged Base operating ratio Consensus est
Slide 37: How We Value the Transaction (Cont.)
How We Value the Transaction (Cont.) Our valuation of CP-NS is based on the following assumptions, which we believe to be conservative Taxes Tax rate of 27.5% for CP and 36.2% for NS while in trust; combined entity post-merger expected to have tax rate below 30% Capital expenditures Consensus estima
Slide 38: Transaction Valuation
Transaction Valuation The CP offer is a substantial premium to both the unaffected share price and what is achievable under NS’s New Standalone Plan No STB STB Approval Approval CP-NS 2021E EPS (CAD) C$25 C$27 Forward P/E Multiple 16.0x 17.0x Fair Value per CP-NS Share at 12/31/20 (CAD) C$399 C$464
Slide 39: A Simplistic Way to Think About the Value of CP-NS
A Simplistic Way to Think About the Value of CP-NS We estimate CP-NS 2017E EPS to be C$16.34 or US$12.29 per share, reflecting the fact that only 42% of the Pre-Merger Operational Improvements and 0% of the Post-Merger Combination Synergies will have been achieved Our mid-2016 valuation of US$204 to
Slide 40: Hunter Harrison's Track Record
Hunter Harrison’s Track Record Best executive in railroad industry; led operational and cultural transformation of IC, CN, and CP into best-in-class railroads Illinois Central – 1989 to 1997 - Led transformation of IC into best performing railway in North America, nearly ~2,000 bps ahead of industry
Slide 41: Jim Squires Background
Jim Squires Background JD, University of Chicago Law School, 1992 Joined NS in 1992 and served in several law positions Vice President Law in 2003 Senior Vice President Law in 2004 Senior Vice President Financial Planning in 2006 Executive Vice President Finance in 2007 Executive Vice President Admi
Slide 42: Hunter's Strategy is Not Short-Term, Cut-to-the-Bone
Hunter’s Strategy is Not “Short-Term, Cut-to-the-Bone”(1) Hunter has a multi-decade track record of definitive outperformance, driven by superior operating performance and revenue growth Total Shareholder Return Over Various Time Periods 400% 300% 4x 200% CN 6x 3x CP 100% CN NS NS NS 0% HH at CN Sin
Slide 43: The Differences in Long-Term Records are Stark
The Differences in Long-Term Records are Stark CP and CN have each improved their operating ratios by ~2,000bps since Hunter Harrison joined, while NS’ operating ratio has been flat over nearly two decades Operating Ratio by Year Hunter Hunter 90% Harrison Harrison Joins CN Joins CP 85% 80% 75% 70%
Slide 44: The Critics and the Consultants Have Been Proven Wrong Before
The Critics and the Consultants Have Been Proven Wrong Before Shareholders heard many of the same unsubstantiated arguments during the CP proxy contest in 2012 “Curves and grades is physics, and the dismissive comments by Mr. Harrison indicates a clear lack of research or understanding or both.” - F
Slide 45: Shareholders Have Heard These Arguments Before
Management’s new plan will work despite a long-term track record of underperformance Hunter’s potential operating improvements are unachievable - “Structural differences” prevent the achievement of comparable results Customers will object, the network is “service-sensitive” Hunter’s track record at
Slide 46: Boards of Target Companies Often Underestimate Their Shareholders
Boards of Target Companies Often Underestimate the Intelligence of their Shareholders Despite a clear and convincing alternative for shareholders, CP’s legacy Board recommended shareholders vote against all but one of our nominees, and would not even meet Hunter Harrison CP’s shareholders delivered
Slide 47: The Value Maximizing Path is Clear
The Value Maximizing Path is Clear Fair Value per NS Share as of mid-2016(2) Pursue the New $90/share ? Standalone 14% premium Plan to unaffected; 1.7% discount to 12/7/15 close Unaffected Merge with Share Price: CP; trust (1) No STB CP & NS CP $125/share $79.14 closes; HH approval separate 58% prem
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