Norfolk Southern rejected Canadian Pacific's latest takeover offer less than an hour after it was announced Tuesday, but the Canadian railroad now appears ready to take its case directly to the shareholders of its rival.
The new offer includes $32.86 cash and 0.451 shares in the combined company that would own both railroads.
That includes less cash than the initial offer of $46.72 per share, but more equity than last month's offer of 0.348 shares in the combined company.
The new bid also promises that Norfolk Southern shareholders could receive the cash next spring before federal regulators complete their review.
The two railroads don't agree on how to value the shares in the new company.
"Canadian Pacific's revised, reduced proposal is not only less than what the Norfolk Southern board has already found to be grossly inadequate, it is even more uncertain and risky given the decrease in the cash consideration," Norfolk Southern Chairman, CEO and President Jim Squires said.
But Canadian Pacific executives and board member Bill Ackman, who leads activist investment firm Pershing Square, said Tuesday they see little downside in trying to combine the two railroads.
They have predicted roughly $1.8 billion in annual cost savings if the railroads are merged, and while the deal is being reviewed Canadian Pacific CEO Hunter Harrison would likely become Norfolk Southern CEO and start making operational changes.
"Most of the synergies come from improving the Norfolk Southern railroad, and those happen regardless of whether the merger is ultimately approved," Ackman said.
Shares of Norfolk Southern, based in Norfolk, Virginia, shed $2.59, or 2.6 percent, to $88.93 in midday trading Tuesday. Canadian Pacific's stock also declined $5.16, or 4 percent, to $125.32.
Federal regulators haven't approved any major railroad mergers in more than 15 years. One of the only major deals in recent years is when Warren Buffett's Berkshire Hathaway conglomerate bought BNSF railroad in 2010.
Norfolk Southern officials said they doubt whether the Surface Transportation Board would approve this merger. So the railroad consulted two former STB commissioners who predicted concerns about competition and the structure of the proposal would doom this deal.
Harrison said he still hopes Norfolk Southern officials will sit down to negotiate, so they can find a way to address both railroads' concerns.
But Canadian Pacific officials are meeting privately with Norfolk Southern shareholders to address their questions, and Harrison said his railroad will consider pursuing a hostile takeover so shareholders can decide whether to pursue the deal.