Filed by Canadian Pacific Railway Limited
Pursuant to Rule 425
under the Securities Act of 1933 and
deemed filed pursuant to Rule 14a-12 under
the Securities Exchange Act of 1934
Subject Company: Norfolk Southern Corporation (Commission File No. 001-8339)
No Offer or Solicitation
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 Canadian Pacific Railway Limited (“CP”) and Norfolk Southern Corporation (“NS”).
Important Information For Investors And Shareholders
Subject to future developments, additional documents regarding the proposed transaction may be filed with the SEC. Investors and security holders are urged to read such disclosure documents regarding the proposed transaction, if and when they become available, because they will contain important information. Investors and security holders may obtain a free copy of the disclosure documents (when they are available) and other documents filed by CP with the SEC at the SEC’s website at www.sec.gov. The disclosure documents and these other documents may also be obtained for free from CP at http://www.cpr.ca/en/investors or by directing a request to Canadian Pacific Railway Limited, 7550 Ogden Dale Road S.E., Calgary, Alberta, Canada, T2C 4X9, Attention: Office of the Corporate Secretary.
Participants in Solicitation
CP and its directors, executive officers and other employees may be deemed to be participants in any solicitation of CP or NS shareholders in connection with the proposed transaction. Information about CP’s executive officers and directors is available in CP’s Annual Report on Form 40-F for the year ended December 31, 2014, which was filed with the SEC on February 23, 2015. Additional information about the interests of potential participants will be included in any proxy statement filed in connection with the proposed transaction.
Forward Looking Statement
This communication contains certain forward-looking information within the meaning of applicable securities laws relating, but not limited, to CP’s proposal to NS regarding a possible business combination, the anticipated results and benefits of the proposed transaction and matters relating to regulatory approvals and changes. This forward-looking information also includes, but is not limited to, statements concerning expectations, beliefs, plans, goals, objectives, assumptions and statements about possible future events, conditions, and results of operations or performance. Forward-looking information may contain statements with words or headings such as “financial expectations”, “key assumptions”, “anticipate”, “believe”, “expect”, “plan”, “will”, “outlook”, “should” or similar words suggesting future outcomes.
Undue reliance should not be placed on forward-looking information as actual results may differ materially from the forward-looking information. Forward-looking information is not a guarantee of future performance. By its nature, CP’s forward-looking information involves numerous assumptions, inherent risks and uncertainties that could cause actual results to differ materially from the forward-looking information, including but not limited to the following factors: the ability of the parties to agree to the terms of a proposed transaction; the ability of the parties to obtain the required regulatory approvals; the ability to recognize the financial and operational benefits of the transaction; changes in business strategies; general North American and global economic, credit and business conditions; risks in agricultural production such as weather conditions and insect populations; the availability and price of energy commodities; the effects of competition and pricing pressures; industry capacity; shifts in market demand; changes in commodity prices; uncertainty surrounding timing and volumes of commodities being shipped via CP; inflation; changes in laws and regulations, including regulation of rates; changes in taxes and tax rates; potential increases in
maintenance and operating costs; uncertainties of investigations, proceedings or other types of claims and litigation; labour disputes; risks and liabilities arising from derailments; transportation of dangerous goods; timing of completion of capital and maintenance projects; currency and interest rate fluctuations; effects of changes in market conditions and discount rates on the financial position of pension plans and investments; and various events that could disrupt operations, including severe weather, droughts, floods, avalanches and earthquakes as well as security threats and governmental response to them, and technological changes. The foregoing list of factors is not exhaustive.
These and other factors are detailed from time to time in reports filed by CP with securities regulators in Canada and the United States. Reference should be made to “Management’s Discussion and Analysis” in CP’s annual and interim reports, Annual Information Form and Form 40-F. Readers are cautioned not to place undue reliance on forward-looking information. Forward-looking information is based on current expectations, estimates and projections and it is possible that predictions, forecasts, projections, and other forms of forward-looking information will not be achieved by CP. Except as required by law, CP undertakes no obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise.
***
The following are presentation materials provided for an investor conference call held on December 16, 2015:
CP ADDRESSES INVESTORS
DECEMBER 16, 2015
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 combination, the anticipated results and benefits of the proposed transaction and matters relating to regulatory
approvals and changes. This forward-looking information also includes, but is not limited to, statements concerning expectations, beliefs, plans, goals, objectives, assumptions and statements about possible future events, conditions, and results of
operations or performance. Forward-looking information may contain statements with words or headings such as “financial expectations”, “key assumptions”, “anticipate”, “believe”, “expect”,
“plan”, “will”, “outlook”,
“should” or similar words suggesting future outcomes.
Undue reliance should not be placed on forward-looking information as actual results may differ materially from the forward-looking information. Forward-looking information is not
a guarantee of future performance. By its nature, forward-looking information involves numerous assumptions, inherent risks and uncertainties that could cause actual results to differ materially from the forward-looking information, including but
not limited to the following factors: the ability of the parties to agree to the terms of a proposed transaction; the ability of the parties to obtain the required regulatory approvals; the ability to recognize the financial and operational benefits
of the transaction; changes in business strategies; general North American and global economic, credit and business conditions; risks in agricultural production such as weather conditions and insect populations; the availability and price of energy
commodities; the effects of competition and pricing pressures; industry capacity; shifts in market demand;
in commodity prices; uncertainty surrounding timing and
volumes of commodities being shipped via CP; inflation; changes in laws and regulations, including regulation of rates; changes in taxes and tax rates; potential increases in maintenance and operating costs; uncertainties of investigations,
proceedings or other types of claims and litigation; labour disputes; risks and liabilities arising from derailments; transportation of dangerous goods; timing of completion of capital and maintenance projects; currency and interest rate
fluctuations; effects of changes in market conditions and discount rates on the financial position of pension plans and investments; and various events that could disrupt operations, including severe weather, droughts, floods, avalanches and
earthquakes as well as security threats and governmental response to them, and technological changes. The foregoing list of factors is not exhaustive.
These and
other factors are detailed from time to time in reports filed by CP with securities regulators in Canada and the United States. Reference should be made to “Management’s Discussion and Analysis” in CP’s annual and interim
reports, Annual Information Form and Form 40-F. Readers are cautioned not to place undue reliance on forward-looking information. Forward-looking information is based on current expectations, estimates and projections and it is possible that
predictions, forecasts, projections, and other forms of forward-looking information will not be achieved by CP. Except as required by law, CP undertakes no obligation to update publicly or otherwise revise any forward-looking information, whether as
a result of new information, future events or otherwise.
2
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 proposed transaction may be filed with the SEC. Investors and security
holders are urged to read such disclosure documents regarding the proposed transaction, if and when they become available, because they will contain important information. Investors and security holders may obtain a free copy of the disclosure
documents (when they are available) and other documents filed by CP with the SEC at the SEC’s website at www.sec.gov. The disclosure documents and these other documents may also be obtained for free from CP at http://www.cpr.ca/en/investors or
by directing a request to Canadian Pacific Railway Limited, 7550 Ogden Dale Road S.E., Calgary, Alberta, Canada, T2C 4X9, Attention: Office of the Corporate Secretary.
CP and its directors, executive officers and other employees may be deemed to be participants in any solicitation of CP or NS shareholders in connection with the proposed
transaction. Information about CP’s executive officers and directors is available in CP’s Annual Report on Form 40-F for the year ended December 31, 2014, which was filed with the SEC on February 23, 2015. Additional information
about the interests of potential participants will be included in any proxy statement filed in connection with the proposed transaction.
3
E. HUNTER HARRISION
CHIEF
EXECUTIVE OFFICER
MARK ERCEG
EVP &
CHIEF FINANCIAL OFFICER
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
asset utilization Yard and terminal optimization
Workforce management (leveraging attrition) War on bureaucracy
POST-MERGER COMBINATION SYNERGIES (28%)
Commencing upon final STB approval:
Extended reach and longer length of haul Market share gains with improved service Interline efficiencies
ADDITIONAL SOURCES OF VALUE CREATION
Effective tax rate below 30%
Cash tax savings of ~$200M annually Asset monetization opportunities Real estate monetization
6
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 multiple 12.2x 13.8x 16.6x 19.3x
Effective premium5 — 14% 58% 77%
Note: Please refer to the December 8, 2015 presentation on www.cpr.ca for detailed modeling assumptions. 1 Share price reflecting 65% operating ratio target
per 12/04/2015 NS investor presentation; 2 Assumes the Pre-Merger Operational Improvements of US$1,260mm phased in at 17%, 42%, 67%, 92% and 100% in ’16, ’17, ’18, ’19 and ’20 respectively based on May 1, 2016 trust
entry with the additional Post-Merger Combination Synergies of US$495mm having the same 4-year phase-in post-close; 3 Represents illustrative value of CP-NS based on 2021E EPS discounted to close into trust at 05/01/2016 by cost of equity if no STB
approval; 4 Represents illustrative value of CP-NS based on 2021E EPS discounted to close into trust at 05/01/2016 by cost of equity if STB approval received; 5 Represents premium to unaffected 45-day VWAP of $79.14
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 at their discretion Provides up to $3.4 billion of increased value to NS shareholders
8
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 12.4x 14.2x
16.6x 19.3x
Effective premium6—14% 36% 47% 61% 78%
1 Based on potential
CVR trading values; Assumes 25% volatility; 2 Share price reflecting 65% operating ratio target per 12/04/2015 NS investor presentation;
3Assumes 4-year Pre-merger
Operational Improvements of US$1,260mm phased in 17%, 42%, 67%, 92% and 100% in ’16, ’17, ’18, ’19 and ’20 respectively
based on
May 1, 2016 trust entry with the additional Post-Merger Combination Synergies of US$495mm having the same 4-year phase-in post-close; 4
Represents
illustrative value of CP-NS per share based on 2021E EPS discounted to close into trust at 05/01/2016 by cost of equity if no
STB approval; 5 Represents
illustrative value of CP-NS per share based on 2021E EPS discounted to close into trust at 05/01/2016 by cost
of equity if STB approval; 6 Represents premium to
unaffected 45-day VWAP of $79.14
APPENDIX
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
(with no payment in the event CP-NS share price is above US$175/share), up to a maximum of US$25/CVR
Measurement period: From April 20, 2017 to
October 20, 2017
Measurement metric: Simple average of daily VWAP during the measurement period
CVR cash payment to occur on October 25, 2017 (T+3 settlement)
Cash payment of up to
US$3.4bn
Even with full CVR cash payment, investment grade rating maintained
CVR cash payment per NS share
$12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00
$100 $125 $150 $175 $200
Illustrative CP-NSC share price at measurement
period (US$/share)
11
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 will trade separately from shares of common stock
in the new company (“CP-NS”) which will own NS and Canadian Pacific Railway Limited
(“Canadian Pacific”). Canadian Pacific will use its reasonable best efforts to list the CVRs on
one or more U.S. and/or Canadian securities exchanges, subject to listing qualifications
Measurement period A value for the CP-NS Common Shares will be determined based on the trading prices of the
CP-NS Common Shares during the period commencing on April 20, 2017, and ending on and
including October 20, 2017 (the “Measurement Period”)
Payout
At maturity, each CVR will receive a cash payment equal to US$175.00 minus the greater of (x)
the average daily volume weighted average price of the CP-NS Common
Shares during the
Measurement Period and (y) US$150.00
Maximum payout
US$25.00
Minimum payout US$0.00
Settlement T+3 (October 25, 2017)
Dilution and dividend The dollar amounts set forth above will be adjusted to appropriately reflect any distribution or
protection dividend paid in CP-NS Common Shares, any non-ordinary course distribution or dividend paid
in cash and any combination, split or reclassification of CP-NS Common Shares.
Restrictions on
Neither Canadian Pacific nor any of its affiliates shall repurchase CP-NS Common Shares
repurchases during the Measurement Period, except for employee equity and
benefit plan purposes
12
An Investor Perspective on CP’s Revised Offer for NS
Pershing Square Capital Management, L.P.
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 combination, the anticipated results and benefits of the proposed transaction and matters relating to
regulatory approvals and changes. This forward-looking information also includes, but is not limited to, statements concerning expectations, beliefs, plans, goals, objectives, assumptions and statements about possible future events, conditions, and
results of operations or performance. Forward-looking information may contain statements with words or headings such as “financial expectations”, “key assumptions”, “anticipate”, “believe”, “expect”,
“plan”, “will”, “outlook”, “should” or similar words suggesting future outcomes.
Undue reliance should not be placed on
forward-looking information as actual results may differ materially from the forward-looking information. Forward-looking information is not a guarantee of future performance. By its nature, forward-looking information involves numerous assumptions,
inherent risks and uncertainties that could cause actual results to differ materially from the forward-looking information, including but not limited to the following factors: the ability of the parties to agree to the terms of a proposed
transaction; the ability of the parties to obtain the required regulatory approvals; the ability to recognize the financial and operational benefits of the transaction; changes in business strategies; general North American and global economic,
credit and business conditions; risks in agricultural production such as weather conditions and insect populations; the availability and price of energy commodities; the effects of competition and pricing pressures; industry capacity; shifts in
market demand; changes in commodity prices; uncertainty surrounding timing and volumes of commodities being shipped via CP; inflation; changes in laws and regulations, including regulation of rates; changes in taxes and tax rates; potential
increases in maintenance and operating costs; uncertainties of investigations, proceedings or other types of claims and litigation; labor disputes; risks and liabilities arising from derailments; transportation of dangerous goods; timing of
completion of capital and maintenance projects; currency and interest rate fluctuations; effects of changes in market conditions and discount rates on the financial position of pension plans and investments; and various events that could disrupt
operations, including severe weather, droughts, floods, avalanches and earthquakes as well as security threats and governmental response to them, and technological changes. The foregoing list of factors is not exhaustive.
These and other factors are detailed from time to time in reports filed by CP with securities regulators in Canada and the United States. Reference should be made to
“Management’s Discussion and Analysis” in CP’s annual and interim reports, Annual Information Form and Form 40-F. Readers are cautioned not to place undue reliance on forward-looking information. Forward-looking information is
based on current expectations, estimates and projections and it is possible that predictions, forecasts, projections, and other forms of forward-looking information will not be achieved by CP. Except as required by law, neither CP nor Pershing
Square Capital Management, L.P. (“Pershing Square”) undertakes any obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise.
1
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 nonpublic information in the possession of NS or other companies discussed in this presentation that could lead others to disagree with the
analyses, conclusions and opinions expressed herein. This presentation and the information contained herein are not investment advice. This presentation does not recommend the purchase, exchange or sale of any security nor is it intended to be, nor
should it be construed as, an offer to sell or a solicitation to buy any securities. All investments involve risk, including the loss of principal.
Subject to
future developments, additional documents regarding the proposed transaction may be filed with the SEC. Investors and security holders are urged to read such disclosure documents regarding the proposed transaction, if and when they become available,
because they will contain important information. Investors and security holders may obtain a free copy of the disclosure documents (when they are available) and other documents filed by CP and/or Pershing Square with the SEC at the SEC’s
website at www.sec.gov<http://www.sec.gov>. The disclosure documents and these other documents may also be obtained for free from CP at http://www.cpr.ca/en/investors or by directing a request to Canadian Pacific Railway Limited, 7550 Ogden
Dale Road S.E., Calgary, Alberta, Canada, T2C 4X9, Attention: Office of the Corporate Secretary.
CP and its directors, executive officers and other employees may
be deemed to be participants in any solicitation of CP or NS shareholders in connection with the proposed transaction. Information about CP’s executive officers and directors is available in CP’s Annual Report on Form 40-F for the year
ended December 31, 2014, which was filed with the SEC on February 23, 2015. Additional information about the interests of potential participants will be included in any proxy statement filed in connection with the proposed transaction.
Bill Ackman and Paul Hilal of Pershing Square serve as directors of CP. Pershing Square manages funds that are in the business of trading – buying and selling
– securities and other financial instruments. It is possible that there will be developments in the future that cause Pershing Square to change its position regarding CP or any other companies mentioned. Pershing Square may buy, sell, cover or
otherwise change the form of its investment in these companies, at any time, for any or no reason. Pershing Square hereby disclaims any duty to provide any updates or changes to the data, analyses, or opinions contained herein including, without
limitation, the manner or type of any Pershing Square investment.
The views expressed in this presentation reflect those of Pershing Square and do not necessarily
reflect the views of CP or its board or management.
2
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 Harrison
CEO of CP CEO of NS
3
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
HoldCo CP or NS
STB NYSE: NSC
Approval
100% of CP, 100% of NS
held in trust
Merger
closes;
Keith Hunter CP & NS
Creel Harrison integrated
CEO of CP CEO of NS
NYSE/TSX: CPNS
4
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 transaction, but instead will receive stock in CP-NS, which will own 100% of CP and
NS
- CP-NS will be a materially different company from the current CP, reflecting the impact of: (1) Hunter Harrison becoming CEO of NS; (2) a lower
operating ratio and higher growth; (3) a new capital structure; and (4) correspondingly higher earnings estimates and P/E ratio
- Investors will likely
also include some value for potential strategic benefits as well as the cost, revenue, and tax synergies which would arise in the event the merger is ultimately approved
While CP’s stock will eventually convert one for one into CP-NS stock, CP’s current share price reflects a substantial discount to CP-NS’s eventual trading price
principally due to NS’s current unwillingness to engage in negotiations
5
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
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 + traded under CVR payment, if
0.451 CP-NS shares + with determined, if any, T+3 days
0.451 CVR anticipated
any (maximum after
exchange payment expiration
Each CP share listing of $25)
exchanged for:
1 CP-NS share
7
Value of Cash
8
Value of Cash
Cash =
$32.86
9
Value of CP-NS Stock
10
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 shares received per 1 NS share:
Value of Stock Consideration per
NS Share at 5/1/16:
$18.77
16x
0.679 $204
0.451 $92
(1) Please see pages 12-14 of Pershing Square’s December 8 presentation for detail on assumptions and methodologies. 11
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 shares received per 1 NS share:
Value of Stock Consideration per
NS Share at 5/1/16:
$20.54
17x
0.679 $237
0.451 $107
(1) Please see pages 12-14 of Pershing Square’s December 8 presentation for detail on assumptions and methodologies. 12
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 Hunter Improvements Harrison $11.13 $12.29
15x to 18x 15x to 18x $167 to $200 $184 to $221 0.451 0.451 $75 to $90 $83 to $100
(1) Assumes analyst consensus estimates for CP and NS, including revenue, OR, tax rates, and capital expenditures, but is pro forma for the capital structure and share count of
CP-NS. “NS with Hunter Harrison” EPS of $12.29 assumes only 42% of the Pre-Merger Operational Improvements and 0% of the Post-Merger Combination Synergies.
13
Value of CVR
14
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 equivalent to a put spread, in which an investor owns a $175 European-style Put and is short a $150 European-style Put
The CVR’s trading price will depend
on the share price of CP-NS during the period between transaction closure into trust in May 2016 and the CVR’s expiration on October 20, 2017
15
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
Investors can choose to hold the CVR through maturity or to sell the CVR for cash at any time after closure into trust
(1) Based on 303 million NS shares outstanding and an exchange ratio of 0.451 CVRs for each NS share.
16
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 into trust through option expiration of
October 20, 2017) Reference price is determined based on the VWAP of CP-NS from 4/20/17 to 10/20/17 Volatility of 25%
- Please see appendix for detailed
volatility assumptions Dividends assumed to be US$0.02 per quarter
17
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 $ 12.29 10.2x 12.2x 14.2x 16.6x 19.3x
2017E CP-NS PF EPS w/ No Synergies $ 11.13 11.2x 13.5x 15.7x 18.3x 21.3x
Implied Put Spread Value of CVR on May 1, 2016 $21.13 $16.05 $10.55 $5.61 $2.37
Exchange Ratio 0.451 0.451 0.451 0.451 0.451
Implied CVR Value per NS Share on May 1,
2016 $9.53 $7.24 $4.76 $2.53 $1.07
$12
Share $10
NS 2016 $8
per 1, $6
Value May $4
CVR on $2
$
US $0
$115 $125 $135 $145 $155 $165 $175 $185 $195 $205 $215 $225 $235
US$ CP-NS
Share Price on May 1, 2016
(1) Please see pages 12-14 of Pershing Square’s December 8 presentation for detail on assumptions and methodologies.
18
Total Value of CP Offer to NS Shareholders
19
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
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 $150 $175 $204 $237
Exchange Ratio 0.451 0.451 0.451 0.451 0.451
Equity Consideration per NS Share on May 1, 2016 $56.38 $67.65 $78.93 $91.90 $106.86
Implied Put Spread Value of CVR on May 1, 2016 $21.13 $16.05 $10.55 $5.61 $2.37
Exchange Ratio 0.451 0.451 0.451 0.451 0.451
CVR Consideration per NS Share on May 1,
2016 $9.53 $7.24 $4.76 $2.53 $1.07
Total Offer Value per NS Share on May 1, 2016 $98.77 $107.75 $116.55 $127.29 $140.79
% Premium to Undisturbed $79.14 25% 36% 47% 61% 78%
CP-NS Implied Discount to Intrinsic Value
of Offer
No STB Approval $127 (22%) (15%) (8%) 0% n/a
With STB
Approval $141 (30%) (23%) (17%) (10%) 0%
CP-NS Implied Earnings Multiple
2017E CP-NS PF EPS w/ Synergies $12.29 10.2x 12.2x 14.2x 16.6x 19.3x
2017E CP-NS PF EPS w/ No
Synergies $11.13 11.2x 13.5x 15.7x 18.3x 21.3x
(1) Please see pages 12-14 of Pershing Square’s December 8 presentation for detail on assumptions and
methodologies. 21
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 The CVR will be a highly liquid, easy-to-value security In
light of the expected CP-NS trading price in 2017, we expect payout under the CVR is unlikely CP-NS will be able to finance any potential payment under the CVR on 10/25/17 with additional borrowings while maintaining its investment grade credit
rating, with 2017E Debt / EBITDA increasing from 2.8x to 3.2x at maximum payout Based on our estimates for the intrinsic value of CP-NS, the revised offer represents a 61% to 78% premium to the undisturbed NS share price
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Appendix
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Volatility Assumptions Used to Value the CVR
Assumed volatility of 25% for $175 Put and 25% for $150 Put
CP one-year realized volatility of
29.25% NS one-year realized volatility of 27.07%
Due to basket structure and volatility dampening from gamma hedging, we are conservatively assuming a volatility
of 25% Changes in volatility have a small effect on CVR value:
CVR Value per NS Share on May 1, 2016 (US$)
Assumed Volatility
21% 23% 25% 27% 29%
$ 125 $ 9.88 $ 9.69 $ 9.53 $ 9.38 $ 9.25
Assumed $ 150 $ 7.34 $ 7.29 $ 7.24 $ 7.21 $ 7.19
CP-NS $ 160 $ 6.14 $ 6.18 $ 6.22 $ 6.26 $ 6.31
Share $ 175 $ 4.41 $ 4.60 $
4.76 $ 4.91 $ 5.04
Price $ 200 $ 2.21 $ 2.51 $ 2.78 $ 3.03 $ 3.26
(US$) $ 204
$ 1.95 $ 2.25 $ 2.53 $ 2.78 $ 3.02
$ 237 $ 0.62 $ 0.84 $ 1.07 $ 1.31 $ 1.54
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