Transaction Creates Enhanced Competition and
Better Service for Customers, and Fosters North American Economic
Growth
Stock and Cash Transaction Representing an
Enterprise Value of Approximately $29 Billion
Companies to Host Investor Conference Call
Today at 2:00 PM Eastern Time
Canadian Pacific Railway Limited (TSX: CP, NYSE: CP) (“CP”) and
Kansas City Southern (NYSE: KSU) (“KCS”) today announced they have
entered into a merger agreement, under which CP has agreed to
acquire KCS in a stock and cash transaction representing an
enterprise value of approximately USD$29 billion1, which includes
the assumption of $3.8 billion of outstanding KCS debt. The
transaction, which has the unanimous support of both boards of
directors, values KCS at $275 per share, representing a 23%
premium2, based on the CP and KCS closing prices on March 19, 2021
(and $270 per share, representing a 26% premium3, based on the
respective CP and KCS 30-day volume weighted average prices
(“VWAP”)).
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the full release here:
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Following the closing into a voting trust, common shareholders
of KCS will receive 0.489 of a CP share and $90 in cash for each
KCS common share held.
Following final approval from the Surface Transportation Board
(“STB”), the transaction will combine the two railroads to create
the first rail network connecting the U.S., Mexico, and Canada.
Joining seamlessly in Kansas City, Mo., in America’s heartland, CP
and KCS together will connect customers via single-network
transportation offerings between points on CP’s system throughout
Canada, the U.S. Midwest, and the U.S. Northeast and points on KCS’
system throughout Mexico and the South Central U.S.
The combined network’s new single-line offerings will deliver
dramatically expanded market reach for customers served by CP and
KCS, provide new competitive transportation service options, and
support North American economic growth. The transaction is also
expected to create jobs across the combined network. Additionally,
efficiency and service improvements are expected to achieve
meaningful environmental benefits.
While remaining the smallest of six U.S. Class 1 railroads by
revenue, the combined company will be a much larger and more
competitive network, operating approximately 20,000 miles of rail,
employing close to 20,000 people and generating total revenues of
approximately $8.7 billion based on 2020 actual revenues.
“This transaction will be transformative for North America,
providing significant positive impacts for our respective
employees, customers, communities, and shareholders,” said CP
President and Chief Executive Officer Keith Creel. “This will
create the first U.S.-Mexico-Canada railroad, bringing together two
railroads that have been keenly focused on providing quality
service to their customers to unlock the full potential of their
networks. CP and KCS have been the two best performing Class 1
railroads for the past three years on a revenue growth basis.”
“The new competition we will inject into the North American
transportation market cannot happen soon enough, as the new USMCA
Trade Agreement among these three countries makes the efficient
integration of the continent’s supply chains more important than
ever before. Over the coming months, we look forward to speaking
with customers of all sizes, and communities across the combined
network, to outline the compelling case for this combination and
reinforce our steadfast commitment to service and safety as we
bring these two iconic companies together,” said Mr. Creel.
“KCS has long prided itself in being the most customer-friendly
transportation provider in North America,” said KCS President and
Chief Executive Officer Patrick J. Ottensmeyer. “In combining with
CP, customers will have access to new, single-line transportation
services that will provide them with the best value for their
transportation dollar and a strong competitive alternative to the
larger Class 1s. Our companies’ cultures are aligned and rooted in
the highest safety, service and performance standards.”
“Importantly, KCS employees will benefit from being part of a
truly North American continental enterprise, which creates a strong
platform for revenue growth, capital investment, and future job
creation. Customers, labor partners, and shareholders will all
benefit from the inherent strengths of this combination, including
attractive synergies and complementary routes,” said Mr.
Ottensmeyer.
Mr. Creel and Mr. Ottensmeyer concluded, “We have been champions
for the environment recognizing the important role rail plays in
lowering overall transportation emissions. This combination
advances our shared science-based pledges in-line with the Paris
Agreement to improve fuel efficiency and lower emissions in support
of a more sustainable North American supply chain.”
Transaction to Expand Options and Efficiencies for
Customers
The combination will provide an enhanced competitive alternative
to existing rail service providers and is expected to result in
improved service to customers of all sizes. Grain, automotive,
auto-parts, energy, intermodal, and other shippers, will benefit
from the increased efficiency and simplicity of the combined
network, which is expected to spur greater rail-to-rail competition
and support customers in growing their rail volumes.
Following final regulatory approval, a single integrated rail
system will connect premier ports on the U.S. Gulf, Atlantic and
Pacific coasts with key overseas markets. The combination of CP and
KCS networks will offer unprecedented reach via new single-line
hauls across the combined company’s continent-wide network.
Importantly, no customer will experience a reduction in
independent railroad choices as a result of the transaction.
Additionally, with both companies’ focus on safety and track
records of operational excellence, customers will benefit from a
seamless integration of the two systems without service
disruption.
CP and KCS interchange and operate an existing shared facility
in Kansas City, Mo., which is the one point where they connect.
This transaction will alleviate the need for a time consuming and
expensive interchange, improving efficiency and reducing transit
times and costs. The combination also will allow some traffic
between KCS-served points and the Upper Midwest and Western Canada
to bypass Chicago via the CP route through Iowa. This will improve
service and has the potential to contribute to the reduction of
rail traffic, fuel burn, and emissions in Chicago, an important hub
city.
Improving Highway Traffic, Environmental Sustainability, and
Safety
In addition to providing new competition against other
railroads, the new single-line routes made possible by the
transaction are expected to shift trucks off crowded U.S. highways,
yielding reduced highway traffic, lower emissions, and less need
for public investments in road and highway bridge repairs. In the
Dallas to Chicago corridor alone, the synergies created by this
combination are expected to result in meaningful reduction in truck
traffic on publicly funded highways.
Rail is four times more fuel efficient than trucking, and one
train can keep more than 300 trucks off public roads and produce 75
percent less greenhouse gas emissions. CP is committed to
sustainability and is currently developing North America’s first
line-haul hydrogen-powered locomotive.
CP and KCS operational expertise and track records as PSR
railroads, coupled with the hand-in-glove fit of the two networks,
will help ensure a smooth, safe and efficient combination of the
two railroads. In combination with KCS, CP will continue to build
on its record as North America’s safest Class 1 railroad for 15
consecutive years based on Federal Railroad
Administration-reportable train accident frequency.
Creating Value for KCS and CP Shareholders
Following the closing into a voting trust, common shareholders
of KCS will receive 0.489 of a CP share and $90 in cash for each
KCS common share held. Preferred shareholders will receive $37.50
in cash for each KCS preferred share held. The fixed exchange ratio
implies a price for KCS of $275 per share, representing a 23%
premium4, based on the CP and KCS closing prices on March 19, 2021
(and $270 per share, representing a 26% premium5, based on the
respective CP and KCS 30-day volume weighted average prices
(“VWAP”)).
Immediately following the closing into trust, KCS common
shareholders are expected to own 25 percent of CP’s outstanding
common shares, providing the ability to participate in the upside
of both companies’ growth opportunities. Following final STB
approval, KCS shareholders will additionally participate in the
realization of synergies resulting from the combination.
By accelerating the combined growth strategies of the two
fastest-growing Class 1s with new efficiencies for customers and
improved on-time performance under their respective PSR programs,
the combined company under CP’s control is expected to create
annualized synergies of approximately $780 million over three
years.
The combination is expected to be accretive to CP’s adjusted
diluted EPS6 in the first full year following CP’s acquisition of
control of KCS, and is expected to generate double-digit accretion
upon the full realization of synergies thereafter.
To fund the stock consideration of the merger, CP will issue
44.5 million new shares. The cash portion will be funded through a
combination of cash-on-hand and raising approximately $8.6 billion
in debt, for which financing has been committed. As part of the
merger, CP will assume approximately $3.8 billion of KCS’
outstanding debt. Following the closing into trust, CP expects that
its outstanding debt will be approximately $20.2 billion.
Pro forma for the transaction, CP estimates its leverage ratio
against 2021E street consensus EBITDA to be approximately 4.0x with
the assumption of KCS debt and issuance of new acquisition-related
debt. In order to manage this leverage effectively, CP will be
temporarily suspending its normal course issuer bid program, and
expects to produce approximately $7 billion of levered free cash
flow (after interest and taxes) over the next three years. CP
estimates its long-term leverage target of approximately 2.5x to be
achieved within 36 months after closing into trust. The combined
company will remain committed to maintaining strong investment
grade credit ratings while continuing to return capital for the
benefit of shareholders.
Two-Step Process to Complete Transaction and Merger
CP’s ultimate acquisition of control of KCS’ U.S. railways is
subject to the approval of the U.S. Surface Transportation Board
(“STB”).
First, CP will establish a “plain vanilla”, independent voting
trust to acquire the shares of KCS. Upon shareholder approval of
the transaction, and satisfaction of customary closing conditions,
CP will acquire KCS shares and place them into the voting trust.
This step is currently expected to be completed in the second half
of 2021, at which point KCS shareholders will receive their
consideration.
CP’s placement of KCS shares into the voting trust will insulate
KCS from control by CP until the STB authorizes control. KCS’
management and Board of Directors will continue to steward the
company while it is in trust, pursuing KCS’ independent business
plan and growth strategies.
The second step of the process is to obtain control approval
from the STB and other applicable regulatory authorities. The STB
review is expected to be completed by the middle of 2022. Upon
obtaining control approval, the two companies will be integrated,
unlocking the benefits of the combination.
Board, Management, and Headquarters
Following STB approval of the transaction, CP will acquire
control of KCS and Mr. Creel will serve as the Chief Executive
Officer of the combined company. The combined entity will be named
Canadian Pacific Kansas City (“CPKC”).
Calgary will be the global headquarters of CPKC, and Kansas
City, Mo. will be designated as the U.S. headquarters. The Mexico
headquarters will remain in Mexico City and Monterrey. CP’s current
U.S. headquarters in Minneapolis-St. Paul will remain an important
base of operations.
Four KCS Directors will join CP’s expanded Board at the
appropriate time, bringing their experience and expertise in
overseeing KCS’ multinational operations.
Advisors
BMO Capital Markets and Goldman Sachs & Co. LLC are serving
as financial advisors to Canadian Pacific. Sullivan & Cromwell
LLP, Bennett Jones LLP and the Law Office of David L. Meyer are
serving as legal counsel. Creel-García-Cuéllar, Aiza y Enríquez,
S.C. are serving as Mexican legal counsel to Canadian Pacific.
Evercore is serving as the Canadian Pacific Board's financial
advisors and Blake, Cassels & Graydon LLP is serving as the
Board's legal counsel.
BofA Securities and Morgan Stanley & Co. LLC are serving as
financial advisors to Kansas City Southern. Wachtell, Lipton, Rosen
& Katz, Baker & Miller PLLC, Davies Ward Phillips &
Vineberg LLP, WilmerHale, and White & Case, S.C. are serving as
legal counsel to Kansas City Southern.
Conference Call for Investment Community
CP and KCS will host a joint investor conference call today,
March 21, 2021, at 2:00PM Eastern Time to discuss the announcement.
A live webcast of the call and the replay will be available on the
CP website at https://investor.cpr.ca/events and the KCS website at
https://investors.kcsouthern.com/events-calendar. Supporting
materials will be posted on www.FutureForFreight.com. To listen to
the live conference call, dial (844) 450-0389 in the U.S. or (236)
714-3016 internationally.
A conference call replay will be available on March 21, 2021, at
5:00PM Eastern Time. To access the replay, dial (800) 585-8367 or
(416) 621-4642 and reference the passcode 3377895.
CP and KCS Launch Website to Serve as Information Hub for All
Stakeholders
Additional information on the transaction and the benefits it is
expected to bring to the full range of stakeholders will be online
at www.FutureForFreight.com. This website will be updated over the
coming months with new information.
Forward Looking Statements and Information
This news release includes certain forward looking statements
and forward looking information (collectively, FLI) to provide CP
and KCS shareholders and potential investors with information about
CP, KCS and their respective subsidiaries and affiliates, including
each company’s management’s respective assessment of CP, KCS and
their respective subsidiaries’ future plans and operations, which
FLI may not be appropriate for other purposes. FLI is typically
identified by words such as “anticipate”, “expect”, “project”,
“estimate”, “forecast”, “plan”, “intend”, “target”, “believe”,
“likely” and similar words suggesting future outcomes or statements
regarding an outlook. All statements other than statements of
historical fact may be FLI. In particular, this news release
contains FLI pertaining to, but not limited to, information with
respect to the following: the transaction; the combined company’s
scale; financial growth; future business prospects and performance;
future shareholder returns; cash flows and enhanced margins;
synergies; leadership and governance structure; and office and
headquarter locations.
Although we believe that the FLI is reasonable based on the
information available today and processes used to prepare it, such
statements are not guarantees of future performance and you are
cautioned against placing undue reliance on FLI. By its nature, FLI
involves a variety of assumptions, which are based upon factors
that may be difficult to predict and that may involve known and
unknown risks and uncertainties and other factors which may cause
actual results, levels of activity and achievements to differ
materially from those expressed or implied by these FLI, including,
but not limited to, the following: the timing and completion of the
transaction, including receipt of regulatory and shareholder
approvals and the satisfaction of other conditions precedent;
interloper risk; the realization of anticipated benefits and
synergies of the transaction and the timing thereof; the success of
integration plans; the focus of management time and attention on
the transaction and other disruptions arising from the transaction;
estimated future dividends; financial strength and flexibility;
debt and equity market conditions, including the ability to access
capital markets on favourable terms or at all; cost of debt and
equity capital; the previously announced proposed share split of
CP’s issued and outstanding common shares and whether it will
receive the requisite shareholder and regulatory approvals;
potential changes in the CP share price which may negatively impact
the value of consideration offered to KCS shareholders; the ability
of management of CP, its subsidiaries and affiliates to execute key
priorities, including those in connection with the transaction;
general Canadian, U.S., Mexican and global social, economic,
political, credit and business conditions; risks associated with
agricultural production such as weather conditions and insect
populations; the availability and price of energy commodities; the
effects of competition and pricing pressures, including competition
from other rail carriers, trucking companies and maritime shippers
in Canada, the U.S. and México; industry capacity; shifts in market
demand; changes in commodity prices; uncertainty surrounding timing
and volumes of commodities being shipped; inflation; geopolitical
instability; changes in laws, regulations and government policies,
including regulation of rates; changes in taxes and tax rates;
potential increases in maintenance and operating costs; changes in
fuel prices; disruption in fuel supplies; uncertainties of
investigations, proceedings or other types of claims and
litigation; compliance with environmental regulations; labour
disputes; changes in labour costs and labour difficulties; risks
and liabilities arising from derailments; transportation of
dangerous goods; timing of completion of capital and maintenance
projects; currency and interest rate fluctuations; exchange rates;
effects of changes in market conditions and discount rates on the
financial position of pension plans and investments; trade
restrictions or other changes to international trade arrangements;
the effects of current and future multinational trade agreements on
the level of trade among Canada, the U.S. and México; climate
change and the market and regulatory responses to climate change;
anticipated in-service dates; success of hedging activities;
operational performance and reliability; customer, shareholder,
regulatory and other stakeholder approvals and support; regulatory
and legislative decisions and actions; the adverse impact of any
termination or revocation by the Méxican government of Kansas City
Southern de México, S.A. de C.V.’s Concession; public opinion;
various events that could disrupt operations, including severe
weather, such as droughts, floods, avalanches and earthquakes, and
cybersecurity attacks, as well as security threats and governmental
response to them, and technological changes; acts of terrorism, war
or other acts of violence or crime or risk of such activities;
insurance coverage limitations; material adverse changes in
economic and industry conditions, including the availability of
short and long-term financing; and the pandemic created by the
outbreak of COVID-19 and resulting effects on economic conditions,
the demand environment for logistics requirements and energy
prices, restrictions imposed by public health authorities or
governments, fiscal and monetary policy responses by governments
and financial institutions, and disruptions to global supply
chains.
We caution that the foregoing list of factors is not exhaustive
and is made as of the date hereof. Additional information about
these and other assumptions, risks and uncertainties can be found
in reports and filings by CP and KCS with Canadian and U.S.
securities regulators, including any proxy statement, prospectus,
material change report, management information circular or
registration statement to be filed in connection with the
transaction. Due to the interdependencies and correlation of these
factors, as well as other factors, the impact of any one
assumption, risk or uncertainty on FLI cannot be determined with
certainty.
Except to the extent required by law, we assume no obligation to
publicly update or revise any FLI, whether as a result of new
information, future events or otherwise. All FLI in this news
release is expressly qualified in its entirety by these cautionary
statements.
Non-GAAP Measures
Although this press release includes forward-looking non-GAAP
measures (adjusted diluted EPS, Free cash flow, earnings before
interest, tax, depreciation and amortization (EBITDA), and a
leverage ratio being adjusted net debt to adjusted earnings before
interest, tax, depreciation and amortization (EBITDA)), it is not
practicable to reconcile, without unreasonable efforts, these
forward-looking measures to the most comparable GAAP measures
(diluted EPS, Cash from operations, Net income, and long-term debt
to net income ratio, respectively), due to unknown variables and
uncertainty related to future results. These unknown variables may
include unpredictable transactions of significant value. Please see
Note on forward-looking Statements above for further
discussion.
About Canadian Pacific
Canadian Pacific is a transcontinental railway in Canada and the
United States with direct links to major ports on the west and east
coasts. CP provides North American customers a competitive rail
service with access to key markets in every corner of the globe. CP
is growing with its customers, offering a suite of freight
transportation services, logistics solutions and supply chain
expertise. Visit cpr.ca to see the rail advantages of CP. CP-IR
About KCS
Headquartered in Kansas City, Mo., Kansas City Southern (KCS)
(NYSE: KSU) is a transportation holding company that has railroad
investments in the U.S., Mexico and Panama. Its primary U.S.
holding is The Kansas City Southern Railway Company, serving the
central and south central U.S. Its international holdings include
Kansas City Southern de Mexico, S.A. de C.V., serving northeastern
and central Mexico and the port cities of Lázaro Cárdenas, Tampico
and Veracruz, and a 50 percent interest in Panama Canal Railway
Company, providing ocean-to-ocean freight and passenger service
along the Panama Canal. KCS' North American rail holdings and
strategic alliances are primary components of a railway network,
linking the commercial and industrial centers of the U.S., Mexico
and Canada. More information about KCS can be found at
www.kcsouthern.com.
ADDITIONAL INFORMATION ABOUT THE TRANSACTION AND WHERE TO
FIND IT
CP will file with the U.S. Securities and Exchange Commission
(SEC) a registration statement on Form F-4, which will include a
proxy statement of KCS that also constitutes a prospectus of CP,
and any other documents in connection with the transaction. The
definitive proxy statement/prospectus will be sent to the
shareholders of KCS. CP will also file a management proxy circular
in connection with the transaction with applicable securities
regulators in Canada and the management proxy circular will be sent
to CP shareholders. INVESTORS AND SHAREHOLDERS OF KCS AND CP ARE
URGED TO READ THE PROXY STATEMENT/PROSPECTUS AND MANAGEMENT PROXY
CIRCULAR, AS APPLICABLE, AND ANY OTHER DOCUMENTS FILED OR TO BE
FILED WITH THE SEC OR APPLICABLE SECURITIES REGULATORS IN CANADA IN
CONNECTION WITH THE TRANSACTION WHEN THEY BECOME AVAILABLE, AS THEY
WILL CONTAIN IMPORTANT INFORMATION ABOUT KCS, CP, THE TRANSACTION
AND RELATED MATTERS. The registration statement and proxy
statement/prospectus and other documents filed by CP and KCS with
the SEC, when filed, will be available free of charge at the SEC’s
website at www.sec.gov. In addition, investors and shareholders
will be able to obtain free copies of the registration statement,
proxy statement/prospectus, management proxy circular and other
documents which will be filed with the SEC and applicable
securities regulators in Canada by CP online at investor.cpr.ca and
www.sedar.com, upon written request delivered to CP at 7550 Ogden
Dale Road S.E., Calgary, Alberta, T2C 4X9, Attention: Office of the
Corporate Secretary, or by calling CP at 1-403-319-7000, and will
be able to obtain free copies of the proxy statement/prospectus and
other documents filed with the SEC by KCS online at www.investors.kcsouthern.com, upon written request
delivered to KCS at 427 West 12th Street, Kansas City, Missouri
64105, Attention: Corporate Secretary, or by calling KCS’s
Corporate Secretary’s Office by telephone at 1-888-800-3690 or by
email at corpsec@kcsouthern.com.
You may also read and copy any reports, statements and other
information filed by KCS and CP with the SEC at the SEC public
reference room at 100 F Street N.E., Room 1580, Washington, D.C.
20549. Please call the SEC at 1-800-732-0330 or visit the SEC’s
website for further information on its public reference room. This
communication shall not constitute an offer to sell or the
solicitation of an offer to buy any securities, nor shall there be
any sale of securities in any jurisdiction in which such offer,
solicitation or sale would be unlawful prior to appropriate
registration or qualification under the securities laws of such
jurisdiction. No offering of securities shall be made except by
means of a prospectus meeting the requirements of Section 10 of the
U.S. Securities Act of 1933, as amended.
PARTICIPANTS IN THE SOLICITATION OF PROXIES
This communication is not a solicitation of proxies in
connection with the transaction. However, under SEC rules, CP, KCS,
and certain of their respective directors and executive officers
may be deemed to be participants in the solicitation of proxies in
connection with the transaction. Information about CP’s directors
and executive officers may be found in its 2021 Management Proxy
Circular, dated March 10, 2021, as well as its 2020 Annual Report
on Form 10-K filed with the SEC and applicable securities
regulators in Canada on February 18, 2021, available on its website
at investor.cpr.ca and at www.sedar.com and www.sec.gov.
Information about KCS’s directors and executive officers may be
found on its website at www.kcsouthern.com and in its 2020 Annual
Report on Form 10-K filed with the SEC on January 29, 2021,
available at www.investors.kcsouthern.com and www.sec.gov. These
documents can be obtained free of charge from the sources indicated
above. Additional information regarding the interests of such
potential participants in the solicitation of proxies in connection
with the transaction will be included in the proxy
statement/prospectus and management proxy circular and other
relevant materials filed with the SEC and applicable securities
regulators in Canada when they become available.
________________
1 Except where noted, all figures are in U.S. dollars.
2 Based on KCS and CP closing share prices of $224.16 and
CAD$474.27 (at 1.2506 FX rate), respectively, as of March 19,
2021.
3 Based on KCS and CP 30-day volume weighted average prices
(“VWAPs”) of $213.87 and US$368.22, respectively, as of March 19,
2021.
4 Based on KCS and CP closing share prices of $224.16 and
CAD$474.27 (at 1.2506 FX rate), respectively, as of March 19,
2021.
5 Based on KCS and CP 30-day volume weighted average prices
(“VWAPs”) of $213.87 and US$368.22, respectively, as of March 19,
2021.
6 Accretion based on adjusted diluted EPS excluding one-time
advisory, financing, and integration costs as well as incremental
transaction-related amortization.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20210321005013/en/
Canadian Pacific
Media Jeremy Berry Tel: 403-819-0571 jeremy_berry@cpr.ca;
alert_mediarelations@cpr.ca
Investment Community Chris De Bruyn Tel: 403-319-3591
investor@cpr.ca
Kansas City Southern
Media C. Doniele Carlson Tel: 816-983-1372
dcarlson@kcsouthern.com
Investment Community Ashley Thorne Tel: 816-983-1530
athorne@kcsouthern.com
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