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Canadian Pacific (CP) has disclosed the offer it has made to Norfolk Southern Corporation (NS) in a letter sent to NS on November 17, 2015, which proposes the two railroads combine to form one new company.
The verbatim text of the letter addressed to NS CEO James Squires is dated November 9. Since there has been considerable appreciation to the NS stock price due to market speculation regarding a potential combination with CP, Squires asked CP CEO Hunter Harrison to hold off on sending this letter until such time as the two CEO’s could meet, which occurred on November 13. The proposal was accepted unanimously by the CP Board of directors.
The letter proposes the offer of a 50 percent cash 50 percent stock transaction based on Friday’s closing stock price for both CP and NS in which NS shareholders would receive $46.72 in cash and 0.348 shares of stock in a new company that would own CP and NS. NS shareholders will own 41 percent of the new company.
Harrison’s letter stated, “In light of the substantial synergies created by the combination, we believe that the fair value of the new company would be approximately $270.68 per share at the time of transaction closure—which is assumed to occur on December 31, 2017. As a result, NSC shareholders will receive at that time $46.72 in cash plus $94.16 in market value of the stock of the combined company which on a present value basis at the time of the anticipated announcement (March 31, 2016) is expected to represent total value of $126.18 per share—which is a 59.4% premium to NSC’s 45-day VWAP of $79.14. In addition, NSC shareholders would continue to receive a dividend of $0.59 per quarter during the pendency of the regulatory review of the transaction.”
The letter listed several potential benefits to NS shareholders, including creation of a transcontinental rail network across North America; global reach through premier ports; integrated operations across at least four major rail gateways; more than US$1.8 billion in annual operating synergies achieved over the next several years; and a collaborative Surface Transportation Board regulatory process.
Additionally, the letter cited enhancing service offering to shippers as a potential benefit. The letter stated that as the combined network creates more end-to-end shipment solutions for customers while reducing congestion in key corridors, an expanded network capacity will improve service and lower costs, something Harrison said is both pro-shipper and pro-competition.
The letter continued, “Finally, the United States and Canada would benefit from having an end-to-end shipment solution that improves safety, reduces highway congestion, improves service, lowers cost and increases overall freight capacity (which is vital to support expanded economic growth) behind an environmentally friendly form of transportation funded exclusively with private versus public expenditures.”
“We are ready to begin working with you and your team immediately on this transformational opportunity and are prepared to commit whatever resources may be necessary to complete the proposed transaction expeditiously and in a manner which both recognizes and fairly addresses any social considerations related to the successful integration of our two great companies,” concluded Harrison’s letter.
CP has retained Simpson Thacher as lead transaction counsel, Stinson Leonard Street and Bennett Jones as United States and Canadian regulatory counsel, respectively, and J.P. Morgan Securities LLC, which has issued a “highly confident letter” regarding CP’s ability to finance the proposed transaction.
NS has confirmed that it has received an unsolicited, low-premium, non-binding, highly conditional indication of interest from CP to acquire NS. The NS board of directors, in consultation with its financial and legal advisors, will carefully evaluate and consider this indication of interest in the context of Norfolk Southern’s strategic plans. Notably, any consolidation among Class I railroads in North America would face significant regulatory hurdles.
The two railroads have recently announced they were named on the CDP‘s Global Performance Report. CP was recognized on the Climate A List 2015 for achieving an A in climate performance and was listed on the Standard & Poor’s (S&P) Climate Disclosure Leadership Index with a 100, the highest score an organization can receive, for its carbon disclosure.
NS achieved a score of 99 on the company’s carbon disclosure and received an A minus on environmental performance. The company was also listed on the S&P Climate Disclosure Leadership Index.
Congress has approved the Surface Transportation Extension Act of 2015 (H.R. 3819) to fund and extend the authorization for federal highway and transit programs through November 20 of this year and extend the deadline for implementation of Positive Train Control (PTC) to December 31, 2018.
Bill H.R. 3819 passed the House of Representatives on a two-thirds vote on October 27 and was introduced and passed in the Senate on October 28.
The bipartisan legislation was introduced on October 22 by Transportation and Infrastructure Committee Chairman Bill Shuster, Ways and Means Committee Chairman Paul Ryan, and Transportation and Infrastructure Committee Ranking Member Peter DeFazio.
“This legislation averts what would have been a catastrophic shutdown of railroad service while putting accountability provisions in place to ensure that implementation of positive train control moves forward,” stated U.S. Senate Commerce, Science, and Transportation Committee Chairman John Thune.
“I urge the president to sign this bipartisan, bicameral measure into law as soon as possible to end the uncertainty surrounding the looming deadline for rail passengers and shippers across the country,” continued Senator Thune. “After two years of intensive oversight work from the Senate Commerce Committee, I am pleased the Congress came together to pass a tough, bipartisan, and accountability-focused measure to ensure that we never need another extension.”
Freight railroads have indicated that, without an extension of the PTC deadline, they will suspend shipments of certain chemicals, such as chlorine used to purify drinking water and anhydrous ammonia used in fertilizer, before the end of the year. Some companies that produce these chemicals already have been forced to begin their production shutdown processes. In other cases, some freight railroads may suspend all shipments of commodities.
Passenger rail service will also be impacted if the PTC deadline is not extended. Commuter railroads will have to suspend operations, and Amtrak service will have to suspend operations outside of the corridor between Washington and New York.
Representative Shuster stated, “Last week, the Transportation Committee unanimously approved bipartisan, multi-year surface transportation legislation, and today’s Surface Transportation Extension Act will ensure that states can continue to fund transportation projects while Congress continues to make progress on the multi-year bill.”
“H.R. 3819 also recognizes that failing to extend the Positive Train Control deadline now will have devastating economic impacts,” Shuster continued. “Not only will railroads stop shipping important chemicals critical to manufacturing, agriculture, clean drinking water, and other industrial activities, but passenger and commuter rail transportation will virtually screech to a halt.”
“A PTC-related rail shutdown would pull $30 billion out of the economy in the first quarter and lead to 700,000 jobs lost in just one month,” continued Shuster. “It’s our responsibility to extend this deadline now, and avoid shutting down much of our rail system.”
“Members of the House and Senate are to be commended for taking the responsible action to extend the PTC deadline,” said Association of American Railroads (AAR) President and CEO Edward R. Hamberger. “This provides the certainty American industries and businesses need to serve the millions of Americans who rely on rail every day. The extension means freight and passenger railroads can continue moving forward with the ongoing development, installation, real-world testing and validation of this complex technology.”
“The rail industry remains fully committed to being accountable and transparent in completing PTC and we look forward to working with Congress to get a broader long-term surface transportation bill to the desk of the President expeditiously,” added Hamberger.
Marmon Holdings, Inc., a Berkshire Hathaway company, has acquired substantially all of GE Railcar Services fleet of railroad tank cars and, in a separate agreement that will be completed by the end of 2015, has also agreed to acquire certain GE Railcar Repair Services repair and maintenance facilities.
The railcar assets will become part of the portfolio of rail equipment managed by Marmon’s Union Tank Car Company (UTLX) and Procor Limited, while the acquired repair facilities will expand the existing network of locations operated by UTLX Repair Services and Procor Repair Services.
Frank Ptak, chairman and CEO of Marmon Holdings, said, “Union Tank Car and Procor have a long history of providing high quality equipment and comprehensive tank car services to their customers throughout North America. This acquisition reflects our continuing commitment to invest in and grow these business units and generate enhanced value for their customers.”
“The addition of the GE Railcar Repair Services sites also will further enhance the full-service capabilities of Marmon’s already extensive repair, maintenance, and inspection network,” added Ptak.
UTLX builds, leases and ships railroad tank cars while Procor provides leasing and repair services throughout Canada.
Additionally, Wells Fargo & Company has announced that First Union Rail, its railcar finance, leasing and fleet management business, has agreed to purchase GE Railcar Services from GE Capital. The transaction will add more than 77,000 railcars and just over 1,000 locomotives to First Union’s existing fleet as well as associated operating and long-term leases. The transaction is expected to close by end of the first quarter of 2016, and terms are not being disclosed.
“GE Railcar Services, with its high quality asset base, has a long history of strength and stability that will add significantly to the quality and diversification of our existing fleet,” said First Union Rail President Barbara Wilson. “We greatly value our client relationships and look forward to meeting the industry’s growing demand for rail cars.”
Ed Blakey, head of Wells Fargo Specialized Lending & Investment, said, “First Union Rail integrates well with the many solutions Wells Fargo offers its corporate and commercial customers to help them succeed financially. We look forward to introducing GE Railcar Services’ customers to Wells Fargo’s broad suite of financial solutions.”
First Union Rail’s acquisition of GE’s railcar and locomotive fleet will make the business the second largest railcar and locomotive leasing company in North America.
Terms of the transactions are not being disclosed.
Progress Rail Services Corp. has entered into a definitive agreement with Amsted Rail Company, Inc. to purchase Rail Product Solutions, Inc. (RPS), a provider of track fastening products and integrated fastening systems. The acquisition is anticipated to close once regulatory approvals are received.
“This acquisition shows our continuing commitment to grow our business and expand our product and service offerings for our customers,” said Progress Rail President and CEO Billy Ainsworth. “RPS is a leader in track fastening systems, and I am proud to have them join the Progress Rail and Caterpillar team.”
“Our focus on high quality products and dependable service has enabled Progress Rail to be a preferred supplier in the rail industry,” said Dave Roeder, senior vice president of Progress Rail’s Engineering and Track Services. “The RPS acquisition expands our portfolio of track related products and allows us to provide more comprehensive solutions to our customers.”
“RPS is a good strategic fit, and a good cultural fit, as their team shares the same passion for customer service and satisfaction as Progress Rail,” added Roeder.
Progress Rail, a member of the Caterpillar Company, is a supplier of railroad products and services.
CSX Chairman and CEO Michael J. Ward has announced changes to several senior management positions, including the resignation of President Oscar Munoz who has joined United Continental Holdings, Inc. as president and chief executive. Clarence W. Gooden, who most recently served as executive vice president and chief sales and marketing officer, has been named president of CSX. All changes to management positions are effective immediately.
“We sincerely congratulate Oscar on his appointment to United and the opportunity to lead another outstanding transportation company,” said Ward. “We all thank him for 12 years of dedicated and successful service to CSX.”
Gooden will oversee both operations and sales and marketing. He has served as executive vice president and chief sales and marketing officer since 2004, helping lead CSX’s growth and value pricing efforts. He has more than 40 years of experience in operations and sales and marketing.
Fredrik J. Eliasson has been named executive vice president and chief sales and marketing officer. In his previous position as executive vice president and CFO, he helped develop and lead strategic initiatives, particularly in efficiency and capital allocation. Prior to his appointment as executive vice president and CFO in 2012, Eliasson served in key sales and marketing and finance leadership roles, including vice president of the chemicals and fertilizer business, vice president of emerging markets, vice president of commercial finance, and vice president of financial planning and analysis. He joined the company in 1995.
Cindy M. Sanborn is the new executive vice president and chief operating officer of CSX Transportation, Inc. She has been serving as executive vice president operations since earlier this year and has helped lead the company’s operating performance and Service Excellence initiatives. Sanborn has served in leadership positions of increasing responsibility in operations, including vice president and chief transportation officer and vice president northern region. She joined CSX in 1987.
Frank A. Lonegro is promoted to executive vice president and chief financial officer. He helped shape and lead efficiency and capital strategies in positions of increasing responsibility, most recently as vice president service design and, before that, president of CSX Technology, vice president mechanical, vice president internal audit and associate general counsel. He joined the company in 1999.
“I look forward to leading this dynamic team, and have every confidence in our ability to deliver a compelling future for CSX,” stated Ward. “I plan to leverage this team’s leadership and tremendous skills in safety, customer service and efficiency as CSX executes its strategies to achieve ever-better levels of financial performance.”
The Federal Railroad Administration (FRA) is soliciting applications from states for $10 million in competitive grants to improve track and highway-rail grade crossings along routes that transport energy products like crude oil and ethanol.
“The U.S. Department of Transportation has made increasing safety at highway-rail grade crossings, especially along routes transporting energy products, one of its top priorities,” stated U.S. Transportation Secretary Anthony Foxx. “This money allows the Department to support innovative ideas and solutions developed at the local level, and I encourage states to apply for this funding.”
Last year there were 269 deaths due to highway-rail grade crossing collisions, the first increase in fatalities in a decade. Collisions at highway-rail grade crossings are the second-leading cause of all railroad-related fatalities. FRA ramped up its campaign earlier this year to prevent these collisions through greater education, stronger enforcement and smarter engineering.
“Most of these deaths are completely preventable, and that is why the Federal Railroad Administration has redoubled its efforts to reverse last year’s upward trend,” said FRA Acting Administrator Sarah Feinberg. “These funds will allow states to take innovative ideas and make them a reality to increase safety and decrease fatalities.”
The U.S. Department of Transportation (DOT) has taken more than 24 actions in the last two years to increase the safety of transporting hazardous materials by rail. The funding for track improvements on energy routes will increase safety on these rail lines.
The FRA guidelines for the grant applications encourage states to include innovative solutions to improve safety, especially at highway-rail grade crossings. The funding is part of the Railroad Safety grants for the Safe Transportation of Energy Products (STEP) by Rail Program.
The Federal Transit Administration (FTA) has announced a proposed rule that would establish a framework for a Public Transportation Safety Program under FTA’s authority, allowing the agency to monitor, oversee and enforce safety in the public transit industry.
“With transit ridership at its highest levels in generations, and our nation’s transit agencies facing increased pressure to meet the demand for service, we must continue to ensure that safety remains the top priority,” said FTA Acting Administrator Therese McMillan. “This rulemaking is a major step forward in establishing FTA’s safety regulatory framework, as all future safety-related rules, regulations and guidance will be informed by the Public Transportation Safety Program.”
The proposed rule would implement FTA’s authority, which was established by Congress in the Moving Ahead for Progress in the 21st Century Act (MAP-21), to conduct inspections, audits, and examinations, and to test equipment, facilities, rolling stock, and the operations of public transit systems. It will also allow the FTA to take appropriate enforcement actions, including directing the use of, or withholding, Federal funds and issuing directives and advisories to the transit agencies.
The proposed rule is based on the principles and practices of Safety Management Systems (SMS), which focuses on organization-wide safety policy and accountability, proactive hazard identification, and risk-based decision-making.
U.S. Transportation Secretary Anthony Foxx stated, “Every day, millions of Americans take public transportation to get to work, school, medical appointments, and other important destinations. This new program will help us ensure that transit continues to be a safe way to get around, and a safe place to work.”
Also in the proposed rule, The FTA has defined a National Public Transportation Safety Plan, which the FTA expects to publish in the Federal Register for public comment in the next several months. The plan will include safety performance for all public transportation, minimum safety performance standards for revenue transit vehicles, a Safety Certification Training Program, and other content determined by FTA.
Public comments on the proposed rule must be received by October 13, 2015.
The Federal Railroad Administration (FRA) has delivered its “Status of Positive Train Control Implementation” report to Congress, showing most railroads will miss the December 31, 2015, positive train control (PTC) implementation deadline.
PTC prevents train-to-train collisions, over-speed derailments, incursions into established work zone limits and a train going to the wrong track because a switch was left in the wrong position.
“Positive Train Control is the most significant advancement in rail safety technology in more than a century,” stated U.S. Transportation Secretary Anthony Foxx. “Simply put: it prevents accidents and saves lives, which is exactly what we seek to do at the Department of Transportation every single day. We will continue to do everything in our power to help railroads install this technology.”
The FRA noted that it has provided significant assistance to railroads to help them become PTC compliant, including funding of more than $650 million to passenger railroads, $400 million in Recovery Act funding, and an issuance of nearly $1 billion loan to the Metropolitan Transportation Authority for PTC on the Long Island Rail Road and Metro-North.
The FRA has also built a PTC testbed in Pueblo, Colo., established a PTC task force, and has worked directly with the Federal Communications Commission (FCC) and the Advisory Council on Historic Preservation to resolve issues related to spectrum use and to improve the approval process for PTC communication towers.
FRA Acting Administrator Sarah Feinberg stated, “The Federal Railroad Administration will continue to use its resources and expertise to help railroads achieve the critical goal to have Positive Train Control implemented.”
The “Status of Positive Train Control Implementation” report was mandated by the House of Representatives Appropriations Committee. The December 31, 2015, PTC implementation deadline was established by Congress in 2008.
Wabtec Corporation plans to acquire, for approximately $1.8 billion including assumed debt, Faiveley Transport S.A., a provider of integrated systems and services for the railway industry. The sale is subject to various conditions, including labor group consultations and other regulatory requirements.
Faiveley Transport is headquartered in Gennevilliers, France, has more than 5,700 employees in 24 countries and generated record sales of approximately $1.2 billion in its most recent fiscal year.
Wabtec’s Executive Chairman Albert J. Neupaver stated, “Faiveley Transport is an excellent strategic fit, expanding our geographic presence considerably, broadening our product and service capabilities, and enhancing our technology and innovation initiatives, all of which will make us a more efficient global competitor.”
“We are excited by the compelling opportunities and synergies created from the combination of two rail industry leaders with historic ties, a commitment to growth and efficiency, and a focus on technology, quality and customer service,” continued Neupaver. “We would be pleased to welcome the Faiveley family as a long-term Wabtec shareholder with representation on our Board of Directors.”
Combining Wabtec and Faiveley Transport will create one of the largest public rail equipment companies, with approximate revenues of $4.5 billion. Wabtec expects to realize at least €40 million in annual pre-tax synergies from the transaction. The acquisition is expected to be accretive to Wabtec’s earnings per diluted share in 2016.
The transaction will be completed in the following steps:
- Wabtec has made an irrevocable offer to the owners of approximately 51 percent of Faiveley Transport’s shares for a purchase price of €100 per share, payable 25 percent in cash and 75 percent in Wabtec preferred stock. Shareholders owning 51 percent of Faiveley Transport have entered into exclusive discussions with Wabtec;
- Wabtec expects that the 51 percent shareholders will enter into a definitive share purchase agreement and Faiveley Transport will enter into a transaction agreement with Wabtec once required labor group consultations are completed; and
- Wabtec will commence a tender offer for the remaining publicly traded Faiveley Transport shares upon completing the share purchase. The public shareholders will have the option to elect to receive €100 per share or Wabtec preferred stock. Wabtec intends to delist Faiveley Transport from Euronext after the tender offer if minority interests represent less than 5 percent.
Wabtec plans to fund the cash portion of the transaction with cash on hand, existing credit facilities and potentially other debt financing.
Raymond T. Betler, Wabtec’s president and CEO, said, “Faiveley Transport brings to Wabtec many complementary products, a strong presence in the European and Asian transit industries, and solid relationships with blue-chip, global customers. Together, we expect to strengthen our ability to help our customers improve their safety, productivity and efficiency. We look forward to working with the Faiveley Transport team to ensure a successful combination for all stakeholders.”
When the transaction is completed, Stéphane Rambaud-Measson, current chairman of the Management Board and CEO of Faiveley Transport, will join Wabtec as president and CEO of Wabtec’s Faiveley Transport group and as Wabtec corporate executive vice president, reporting to Betler.
“The combination of our operations with Wabtec would be an excellent strategic move for Faiveley Transport,” said Rambaud-Measson. “Our complementarity is remarkable, both in terms of product portfolios and geographies. This transaction would enable us to pursue our ambition to become a global leader in railway equipment and services for the passenger transit market.”
“Faiveley Transport would double in size with the contribution of Wabtec’s transit division thus enlarging the French industrial footprint of the group. The strong commitment of the Faiveley family as long-term shareholders is a testimony of the powerful industrial rationale of the proposed combination,” added Rambaud-Measson.
UBS Investment Bank and DC Advisory are serving as financial advisors to Wabtec for the transaction, and Jones Day is acting as legal advisor.
Federal Railroad Administration (FRA) Acting Administrator Sarah Feinberg recently spoke before a House Committee about the state of positive train control (PTC) implementation in the United States, saying that despite FRA’s financial support, technical assistance and repeated warnings to Congress, many railroads have stated publicly they will not meet the December 31, 2015, deadline for PTC implementation.
Feinberg pointed out to the U.S. House Committee on Transportation and Infrastructure, Subcommittee on Railroads, Pipelines, and Hazardous Materials that the initial analysis of recent information from 32 of the 38 railroads the FRA is currently tracking for enforcement purposes has found that Class I railroads have:
- Completed or partially completed installations of approximately 50 percent of the locomotives that require PTC equipment;
- Deployed approximately 50 percent of wayside units;
- Replaced approximately 50 percent of signals that need replacement; and
- Completed most of the required mapping for PTC tracks.
“As I have stated to this committee before: safety is the Federal Railroad Administration’s top priority,” said Feinberg. “The rail system is not as safe as it could be without the full implementation of PTC. A safe rail system requires the full implementation of Positive Train Control. And that’s why FRA will enforce the Dec. 31, 2015 deadline for implementation, just as Congress mandated.”
Feinberg noted that, following passage of the PTC mandate in 2008, railroads submitted their PTC Implementation Plans in 2010 that laid out a path that would allow each railroad to meet the deadline.
“For several years, FRA has been sounding the alarm that most railroads have not made sufficient progress in implementing PTC. In the 7 years since passage of the PTC mandate, FRA has dedicated significant resources and worked closely with the railroad industry in order to assist and guide implementation,” she said.
Feinberg noted that the FRA has hired extra staff to assist with the issue, worked with the Federal Communications Commission to resolve spectrum issues and improve the approval process related to PTC communication towers, built a PTC system test bed at its Transportation Technology Center in Pueblo, Colo., and provided funding of approximately $650 million in grants funds to support PTC.
“I have also established a new PTC Task Force Team within FRA – that team is aggressively managing and monitoring each individual railroads’ progress, tracking data, ensuring we have the most accurate and up-to-date information, and reporting in to me multiple times per week,” said Feinberg. “This team is working in close collaboration with the many individuals at FRA, based here in Washington and in offices around the country, already working on this challenge.”
Feinberg informed the committee that, according to the American Public Transportation Association, (APTA), 29 percent of commuter railroads are planning to complete installation of PTC equipment by the end of 2015, with full implementation of PTC for all commuter lines expected by 2020. She also said that the Association of American Railroads (AAR) projects that the following will completed by the end of 2015:
- 39 percent of locomotives will be fully equipped;
- 76 percent of wayside interface units will be installed;
- 67 percent of base station radios will be installed; and
- 34 percent of required employees will be trained.
Starting on January 1, 2016, FRA will impose penalties on railroads that have not fully implemented PTC.
“Fines will be based on FRA’s PTC penalty guidelines, which establish different penalties depending on the violation,” she explained. “The penalties may be assessed per violation, per day and may be raised or lowered depending on mitigating or aggravating factors. The total amount of penalty each railroad faces will depend upon the amount of implementation progress the railroad has made.”
“FRA will also use additional, appropriate enforcement tools to ensure railroads implement PTC on the fastest schedule possible – be it emergency orders, compliance orders, compliance agreements, additional civil penalties, or any other tools at our disposal,” Feinberg said.
She said that the FRA asked Congress to provide them with additional authorities in order to review, approve, and require interim safety measures for individual railroads between January 1, 2016 and each railroad’s full PTC implementation.
“These interim safety requirements would be to ensure railroads are forced to raise the bar on safety if they miss the PTC deadline – but will not and cannot be used to replace or extend the deadline,” said Feinberg.
The Rail Safety Improvement Act of 2008 requires that, by December 31, 2015, PTC be fully implemented on Class I railroad main lines where any toxic hazardous materials are transported and on main lines where regularly scheduled intercity or commuter rail passenger service is conducted.