Norfolk Southern Corporation · NYSE:NSC
Norfolk Southern — Merger or Acquisition (December 2015)
37 slides from Norfolk Southern's merger presentation, Dec 16, 2015
Slide 1: CP Addresses Investors December 16, 2015
CP ADDRESSES INVESTORS DECEMBER 16, 2015
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: E. Hunter Harrison, Chief Executive Officer
E. HUNTER HARRISION CHIEF EXECUTIVE OFFICER
Slide 5: Mark Erceg, EVP & Chief Financial Officer
MARK ERCEG EVP & CHIEF FINANCIAL OFFICER
Slide 6: Substantial Value Creation
SUBSTANTIAL VALUE CREATION Fuel Support $100M functions $270M Train productivity $230M Revenue $225M US$1.8B Workforce productivity $550M Locomotive productivity $380M PRE-MERGER OPERATIONAL IMPROVEMENTS (72%) Commencing upon trust approval: Fuel efficiency improvement Velocity improvement Improved
Slide 7: A Compelling Offer
A COMPELLING OFFER No STB STB Merger Merger Approval Approval $140 Cash component $125 Stock component $91 $79 $107 $92 Unaffected NS plan1 price share price Share $33 $33 NS Standalone Projected CP-NS2 Value Share price $79 $91 $2043 $2374 Synergies (US$bn) 0.0 0.0 1.3 1.8 Implied 2017E P/E multipl
Slide 8: Enhancing the Value with a CVR
ENHANCING THE VALUE WITH A CVR Previous Offer US$32.86 in cash in May 2016 0.451 shares in new company Current Offer US$32.86 in cash in May 2016 0.451 shares in new company 0.451 of a Contingent Value Right (CVR) A CVR is a highly liquid instrument which gives holders an ability to convert to cash
Slide 9: How a CVR Enhances the Offer
HOW A CVR ENHANCES THE OFFER Cash component Stock component CVR value1 $141 $128 $1 $116 $108 $3 $5 $7 $91 $79 $107 $92 $79 $68 Unaffected NS share plan2 price $33 $33 $33 $33 Share price $79 $91 $150 $175 $2044 $2375 Synergies (US$bn) 0.0 0.0 0.5 0.5 1.3 1.8 Implied 2017E P/E multiple 12.2x 13.8x 1
Slide 10: Appendix
APPENDIX
Slide 11: Overview of CVR Mechanism
OVERVIEW OF CVR MECHANISM Summary of CVR mechanism Measurement period and metric CVR cash payments Rating considerations Each CVR would entitle the holder to receive a cash payment from CP equal to the difference between the CP-NS share price during the relevant measurement period and US$175/share (
Slide 12: CVR Terms
CVR TERMS Number of CVRs to 0.451 contingent value rights (“CVRs”) per Norfolk Southern Corporation (“NS”) share of be issued common stock outstanding at the effective time of the Merger, or approximately 137 million CVRs in the aggregate Trading / listing The CVRs will be separate instruments and w
Slide 13: An Investor Perspective on CP's Revised Offer for NS
An Investor Perspective on CP’s Revised Offer for NS Pershing Square Capital Management, L.P.
Slide 14: 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 15: 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 16: Illustrative Transaction Structure at Closing
Illustrative Transaction Structure at Closing The Management Change Transaction May 1, 2016 (Closure into Trust) 1 NS share = $32.86 in cash + 0.451 CP-NS shares + 0.451 CVRs CP SH: NS SH: 53% 47% CP-NS HoldCo 100% of CP, 100% of NS held in trust 1 CP share = 1 CP-NS share Keith Hunter Creel Harriso
Slide 17: Illustrative Transaction Structure After STB Ruling on Merger
Illustrative Transaction Structure After STB Ruling on Merger The Merger Transaction The Spinoff Transaction (Subject to STB Approval) (If Merger is Not Approved by STB) On or Before 12/31/17 2018-2019 CP SH: NS SH: 53% 47% CP and NS No STB separate via NYSE: TSX: CP CP CP-NS Approval spinoff of Hol
Slide 18: Norfolk Southern Has Mischaracterized the Value of CP's Offer
Norfolk Southern Has Mischaracterized the Value of CP’s Offer NS has used the nominal offer price, including CP’s current share price, to describe the value of CP’s offer to NS shareholders as “grossly inadequate” This methodology is incorrect; NS shareholders will not receive CP stock in the transa
Slide 19: CP's New Offer
CP’s New Offer $32.86 in Cash 0.451 shares of CP-NS 0.451 CVRs on CP-NS Total Value per NS Share 6
Slide 20: Timeline of Consideration to NS Shareholders
Timeline of Consideration to NS Shareholders Close into trust; STB ruling on HH runs NS, merger expected Creel runs CP on or before May 1, Oct. 20, Oct. 25, Dec. 31, 2016 2017 2017 2017 Each NS share CVRs CVRs expire; CVR holders exchanged for: freely cash payment receive cash $32.86 in cash + trade
Slide 21: Value of Cash
Value of Cash 8
Slide 22: Value of Cash
Value of Cash Cash = $32.86 9
Slide 23: Value of CP-NS Stock
Value of CP-NS Stock 10
Slide 24: Value of CP-NS – No STB Approval of Merger
Value of CP-NS – No STB Approval of Merger Estimate 2021 EPS including Pre-Merger Operational Improvements and no Post-Merger Combination Synergies(1): Apply forward P/E multiple: Discount Factor from 12/31/20 to 5/1/16 at 9% Cost of Equity: Implied Value of CP-NS at 5/1/16: Exchange Ratio – CP-NS s
Slide 25: Value of CP-NS – With STB Approval of Merger
Value of CP-NS – With STB Approval of Merger Estimate 2021 EPS including Pre-Merger Operational Improvements and Post-Merger Combination Synergies(1): Apply forward P/E multiple: Discount Factor from 12/31/20 to 5/1/16 at 9% Cost of Equity: Implied Value of CP-NS at 5/1/16: Exchange Ratio – CP-NS sh
Slide 26: A Simple and Conservative Way to Value CP-NS
A Simple and Conservative Way to Value CP-NS Estimate 2017 EPS with and without impact of Hunter at NS(1): Apply forward P/E multiple: Implied Value of CP-NS at 5/1/16: Exchange Ratio – CP-NS shares received per 1 NS share: Value of Stock Consideration per NS Share at 5/1/16: No Operational NS with
Slide 27: Value of CVR
Value of CVR 14
Slide 28: What the CVR Provides to NS Shareholders
What the CVR Provides to NS Shareholders The CVR can be thought of in two ways A long-term insurance policy that protects investors if CP-NS’s share price is below $175 per share, or A liquid security which can be sold by NS shareholders at or after the transaction closes in May 2016 The CVR is equi
Slide 29: What the CVR Provides to NS Shareholders (Cont.)
What the CVR Provides to NS Shareholders (Cont.) The CVR can be easily valued Highly liquid given ~137 million units outstanding(1) Anticipated exchange listing Readily valued by option pricing models, or By comparison to listed put options that will expire on the same day, October 20, 2017 Investor
Slide 30: How to Value the CVR
How to Value the CVR The value of the CVR is determined by subtracting the value of the $150 Put from the value of the $175 Put We valued the Put spread with the Black-Scholes Average Price Option Model using the following assumptions: Duration of ~18 months (537 days assuming May 1, 2016 closure in
Slide 31: Value of CVR on May 1, 2016 Upon Trust Closure
Value of CVR on May 1, 2016 Upon Trust Closure (All figures in USD) Bottom Top End of End of Est. Intrinsic Value(1) CVR CVR No STB STB Range Range Approval Approval Assumed CP-NS USD Stock Price on May 1, 2016 $125 $150 $175 $204 $237 Implied Earnings Multiples 2017E CP-NS PF EPS w/ Synergies $ 12.
Slide 32: Total Value of CP Offer to NS Shareholders
Total Value of CP Offer to NS Shareholders 19
Slide 33: Total Value of CP's New Offer
Total Value of CP’s New Offer $32.86 in Cash 0.451 shares of CP-NS 0.451 CVRs on CP-NS Total Value per NS Share 20
Slide 34: CP's Offer Value to NS at Various Share Prices
CP’s Offer Value to NS at Various Share Prices (All figures in USD) Bottom Top End of End of Est. Intrinsic Value(1) CVR CVR No STB STB Range Range Approval Approval Cash Consideration per NS Share on May 1, 2016 $32.86 $32.86 $32.86 $32.86 $32.86 Assumed CP-NS USD Stock Price on May 1, 2016 $125 $1
Slide 35: CP's Revised Offer to NS
CP’s Revised Offer to NS The revised offer and CVR issuance reflects CP’s confidence in the ultimate value of the transaction Represents approximately $10 per NS share of additional consideration based on the current trading price of CP Provides insurance on the ultimate trading value of CP-NS stock
Slide 36: Appendix
Appendix 23
Slide 37: Volatility Assumptions Used to Value the CVR
Volatility Assumptions Used to Value the CVR Assumed volatility of 25% for $175 Put and 25% for $150 Put CP one-year realized volatility of 29.25% NS one-year realized volatility of 27.07% Due to basket structure and volatility dampening from gamma hedging, we are conservatively assuming a volatilit
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