Should Norfolk Southern (NSC) just say no to Canadian Pacific's (CP) $95 offer announced yesterday, given that the stock was just at $72 not that long ago? Should it take the money and run? Or should it hold out for something higher, given that the stock traded at $117 at this point last year?
Right now it sure sounds like Norfolk Southern wants nothing to do with the offer, or wants something much higher if it is going to sell out to CP -- if it wants to sell at all.
I can't blame the company. Right now, the rails are caught in the grips of a huge decline in coal, the bedrock cargo for this business, and it's getting worse, not better, anytime soon, given the much lower cost of natural gas as a feedstock. Utilities that can switch from one fuel to another, however, have mostly done so. Coal, which represents almost 40% of the fuel for the U.S. electric grid, is not expected to go below 30% within the next 10 years even though natural gas is cheaper, abundant and cleaner.
So, it's pretty easy to see why Norfolk Southern is saying that coal's decline is bottoming out and its stock reflects too much negativity about that cargo and not enough of the positives that come from robust intermodal traffic.
And while Norfolk Southern does ship some oil -- a business that is in severe decline given the price of crude -- it's Canadian Pacific that's been the bell cow of that cargo and it needs Norfolk Southern to make up for that lost traffic.
It seems to me as if Canadian Pacific is simply taking advantage of the decline of one particular cargo that might soon be at rock bottom for Norfolk Southern in order to steal the company.
In fact, it is somewhat reminiscent of another deal, from another time -- a hostile $70 bid made by Air Products (APD) to cross-region rival Airgas (ARG), five years ago, a bid that the management of Airgas argued was absurdly low at the time. How ironic, given that yesterday Airgas accepted a $143 bid from French competitor Air Liquide -- a huge premium to the $106 price that Airgas had been trading at the day before and fully 12 points higher the $94 it had fallen to just last week.
The Airgas story's relevant for Norfolk Southern because like Canadian Pacific, which has apparently made several overtures to Norfolk Southern, Air Products pursued Airgas for ages, going from $60 to $70 in its hostile bid, prices that Airgas was confident it could do better than, even though its stock was almost $20 lower from the initial offer.
Peter McCausland, the CEO at the time, expressed confidence that he could do better, in part because his stock had traded higher than the initial bid before the great recession and he felt that Air Products was simply taking advantage of the momentary dip in the economy to pick up its rival on the cheap. Isn't it possible that Canadian Pacific is doing the same? Or should shareholders of Norfolk Southern be glad to get any sort of premium in this new, tough market?
I usually advise managements to "do the right thing" and take the money for shareholders. In fact, the only time I have ever violated that dictum is in the Airgas hostile takeover. I sided with management, because unlike so many CEOs, Peter McCausland had actually built the company himself and owned about 10% of it. He had been a frequent guest of Mad Money and had traced out a multi-year vision that had the stock going up well through $100 if he just had a chance to get it there.
McCausland was no hired hand. And he knew better than anyone what the business was worth. I came out hard for him over multiple weeks, endlessly, and I am thrilled to say that Peter thanked me for helping turn the tide against Air Products so he could live to play again. The $143 bid is far cry from the $70 APD offered, and McCausland, who is now chairman, will get about a billion dollars for his patience and perseverance. It's money that he's earned and helped earn for you, if you stuck with him.
Should Norfolk Southern play hard to get? Should it just reject the bid out of hand? Unlike Air Products, management at NSC didn't create the company. Nevertheless, management can still make a compelling case, like Airgas, that this is a cyclical trough, and it's worth hanging on for higher prices.
Hmm, maybe this the rare bid, like that of Airgas five years ago, that's just worth saying no to once again.