Stock and Cash Transaction Representing an
Enterprise Value of Approximately $31
Billion
The Achievable, Pro-competitive CP-KCS
Alternative Brings Compelling Short- and Long-term Value, More
Regulatory Certainty
CALGARY, AB, Aug. 10, 2021 /PRNewswire/ - Canadian Pacific
Railway Limited (TSX: CP) (NYSE: CP) ("CP") today announced it has
submitted a superior proposal to acquire Kansas City Southern
("KCS") in a stock and cash transaction representing an enterprise
value of approximately USD$31
billion1, offering KCS stockholders an
alternative recognizing the premium value of KCS while providing
more regulatory certainty.
The proposed transaction, which has the unanimous support of the
CP Board of Directors, values KCS at $300 per share, representing a 34%
premium2, based on the CP closing price on August 9, 2021 and KCS unaffected closing price
on March 19, 2021. Following the
closing into a voting trust, common shareholders of KCS will
receive 2.884 CP common shares and $90 in cash for each share of KCS common stock
held. The proposed transaction includes the assumption of
$3.8 billion of outstanding KCS
debt.
This superior proposal represents improved terms to those agreed
to in the CP-KCS merger agreement entered into on March 21, 2021 that are substantially similar to
those in the CN merger agreement, but offers significantly higher
regulatory certainty than the proposed CN merger and significantly
higher value than our previously agreed combination.
___________________
|
1
|
Except where noted,
all figures are in U.S. dollars.
|
2
|
Based on KCS closing
share price of $224.16 as of March 19, 2021 and CP closing share
price of CAD$91.50 (at 1.2565 FX rate) as of August 9,
2021.
|
The full text of the Aug. 10, 2021
letter to the KCS Board of Directors outlining the proposal is
below:
Board of Directors
c/o Pat Ottensmeyer
Kansas City Southern
427 West 12th Street
Kansas City, Missouri 64105
Dear Members of the Kansas City Southern ("KCS") Board of
Directors:
On behalf of Canadian Pacific Railway Limited ("CP"), I am
pleased to submit the following revised offer ("Offer") for CP to
combine with KCS.
As we have stated previously, we understood and respected the
KCS Board of Directors' decision to explore the path to a
transaction with Canadian National Railway Company ("CN") in the
exercise of its fiduciary duties. Nevertheless, CP has always
believed that CN's deal was not executable and an attempt to
dismantle the unique, pro-competitive deal that CP and KCS had
agreed upon. We remain confident that the Surface
Transportation Board (the "STB") will ultimately reject CN's
proposal to use a voting trust and prove that the proposed CN
merger is not a viable transaction.
At the time of CN's offer in May, we chose to not make a revised
offer because we believed that engaging in a bidding war with CN
would have been value destructive to CP shareholders, and we
continue to stand by that decision as having been the right
one. However, we believe that now is the right time for us to
re-engage with KCS, as the regulatory uncertainty of the proposed
CN merger has placed KCS stockholders in the unfortunate position
of having to vote on the proposed CN merger and, as a consequence
of approving such proposal, eliminate KCS's ability to consider
superior offers, all the while not having any level of certainty
with respect to whether the STB will approve CN's use of a voting
trust. We are excited to provide KCS stockholders a
significantly more attractive alternative to this situation: this
opportunity to turn down the CN merger proposal and once again
pursue a combination of CP and KCS—a more certain transaction which
offers compelling short-term and long-term value that is actually
achievable, already has the benefit of STB approval to use a voting
trust and is, in our view, the only viable Class 1 merger.
Unlike a combination with CN, a CP-KCS combination will be
transformational in a positive manner for the railroad industry and
will serve the best interests of our respective customers,
shareholders and other stakeholders and the North American
economy. This end-to-end combination, with a focus on growth,
would also ensure the viability of KCS's full network going
forward, without the need to address issues related to overlap as
in the proposed CN merger. Bringing together CP and KCS, two
railroads that have been keenly focused on providing quality
service to customers, will unlock the full potential of our
networks and our people, and KCS stockholders will have the benefit
of participating in the upside of our combined company's
growth.
Today, well over two months following your agreement with CN,
KCS stockholders are being asked to vote in favor of a transaction
that has yet to receive STB approval for closing into voting trust
and offers them only risk and uncertainty. During the course of our
recent engagement with your stockholders, the most frequent
questions we have faced have been (1) will CP be there when the
proposed CN merger fails and (2) what will CP be prepared to offer
KCS stockholders. It is understandable that the KCS stockholders,
being presented with a transaction that is highly unlikely to
close, are eager to understand CP's actionable alternative. In
response to the concerns raised by the KCS stockholders, we believe
that it is imperative that KCS management, the KCS Board of
Directors and the KCS stockholders understand the CP
alternative.
The Offer
The terms of our Offer are set forth below:
- Holders of KCS common stock will receive 2.884 CP common shares
and $90 in cash for each share of KCS
common stock held, representing a value of approximately
$300 per common share based on CP
closing market price as of August 9,
2021. This represents an increase of $25 per KCS share over the offer price at the
time of our previously agreed combination and a 34% premium to
KCS's unaffected price based on the KCS closing share price of
$224 as of March 19, 2021. Holders of KCS preferred stock
will continue to receive $37.50 in
cash for each share of KCS preferred stock held.
- This Offer is subject to the execution of a merger agreement on
terms substantially as set forth in the draft merger agreement
attached as Annex A hereto (the "Merger Agreement", and the
transactions contemplated thereby, the "Transaction").
- The cash portion of the consideration will be funded through a
combination of cash-on-hand and approximately $9.5 billion in new debt. In connection
with this Offer, we are submitting commitment letters, by and among
CP, as covenantor, and Canadian Pacific Railway Company, as
borrower, and Bank of Montreal and
Goldman Sachs Lending Partners LLC, as commitment parties (the
"Commitment Parties"), together with the redacted fee letter
related thereto, in each case executed on behalf of the Commitment
Parties, and which are attached as Annex B hereto.
- In connection with KCS's termination of the Agreement and Plan
of Merger, dated as of May 21, 2021,
by and among CN, Brooklyn Merger Sub, Inc. and KCS (the "CN
Agreement") in accordance with the terms thereof in order to accept
this Offer and enter into the Merger Agreement, upon receiving
satisfactory evidence of KCS having paid, or having caused to be
paid, the Company Termination Fee and CP Termination Fee Refund (as
such terms are defined in the CN Agreement) pursuant to and in
accordance with the terms of the CN Agreement as in effect on the
date hereof, CP will advance or cause to be advanced to KCS an
amount equal to the aggregate amount of the Company Termination Fee
and the CP Termination Fee Refund (the latter constituting a refund
and return by CP of the "Company Termination Fee" received by CP
from KCS on the termination of the prior merger agreement between
CP and KCS).
Benefits of CP's Offer for KCS Stockholders
Our Offer, which is based solely on publicly available
information, represents improved terms to those we had agreed to in
our previously agreed combination that are substantially similar to
those in the CN Agreement, but offers significantly higher
regulatory certainty than the proposed CN merger and considerably
higher value than our previously agreed combination.
We believe that our Offer is superior to the proposed CN merger
due to the greater regulatory and value certainty it provides KCS
stockholders. CP has a clear path to closing with STB voting
trust approval (a condition CN has still not been able to satisfy)
already in-hand. Furthermore, the STB has affirmed that the
pro-competitive CP-KCS combination would be evaluated under the
pre-2001 STB merger rules, unlike the CN-KCS combination which
would be scrutinized under the more stringent STB merger rules
adopted in 2001. The new rules were designed to address the
exact kinds of threats to competition and other issues posed by a
CN-KCS combination, and they place a "heavier burden on merger
applicants to show that a major rail combination is consistent with
the public interest." KCS stockholders should not assume that
there is any certainty of value in the proposed CN merger given the
level of uncertainty as to whether the STB voting trust approval or
final approval of the combination will be obtained by CN,
especially in view of President Biden's recent executive order on
"Promoting Competition in the American Economy" and the fundamental
anticompetitive issues raised by the proposed CN merger that would
exist immediately upon the closing of the Proposed CN Merger into
voting trust due to, among other things, the overlapping and
parallel character of CN's and KCS's routes.
On the other hand, our Offer presents a compelling strategic
combination of CP and KCS, two railroads whose networks you joined
us in describing as "a perfect and natural fit", to form the first
U.S.-Mexico-Canada rail network that is truly end-to-end
and pro-competitive with no overlap, and which, in our view, is the
only viable Class 1 combination. We remain eager and
committed to bringing together the two best performing Class 1
railroads for the past three years on a revenue growth basis. We
have extensive experience in successfully integrating acquired
businesses and a strong track record of realizing synergies, and
our similar cultures, shared focus on safety and collective
commitment to providing significant positive impacts for our
respective employees, customers, communities, and shareholders have
not changed. CP's leading management team has consistently
outperformed CN and delivered superior results for its
shareholders. CP's proven track record of performance and its
record as the safest Class 1 railroad for 15 consecutive years will
serve KCS well. We will, in turn, benefit from your leadership and
expertise as we grow sustainably, together. We are confident
that, together with your experienced and talented team, we will be
able to continue that success in a combination of CP and KCS to the
benefit of both sets of shareholders.
Following the closing of the Transaction, KCS stockholders would
own approximately 28% of the combined company (reflecting a 3%
increased ownership as compared to our previously agreed
combination). Our combined company would be well positioned
for growth, bringing together the two railroads with the highest
3-year revenue CAGR and generating increased annual synergies of
$1 billion within three
years.
We recognize that you may not wish to take action with respect
to our Offer in advance of your upcoming Special Meeting of
Stockholders to vote on the proposed CN merger; however, as
indicated above, we believe it is important that you and your
stockholders fully understand our Offer in advance of your
stockholder vote. We request that you promptly take formal action
on our Offer at the earliest of receipt of the STB's denial of CN's
voting trust or a reasonable period of time prior to your
stockholders' meeting to approve the proposed CN merger on
August 19th.
In closing, we remain truly excited about once again pursuing
this once-in-a lifetime partnership together and remain committed
to everything this opportunity presents. These two companies have
long, proud histories and an even brighter future, together.
Respectfully yours,
Keith Creel
President and Chief Executive Officer
Canadian Pacific Railway Limited
CP Proxy Statement for KCS stockholder meeting
CP has filed a proxy statement asking stockholders to vote
"AGAINST" the proposed CN-KCS combination at the KCS special
meeting of stockholders on Aug. 19,
2021 so that KCS's stockholders avoid being locked into
the CN-KCS deal and unable to consider other, better, options.
Regulatory review
CP continues to pursue its
application process for a potential acquisition of KCS so that the
STB can review the pro-competitive CP-KCS combination without undue
delay. Importantly, the STB has already approved CP's use of a
voting trust and affirmed KCS' waiver from the new rail merger
rules it adopted in 2001 because a CP-KCS combination is truly
end-to-end, pro-competitive, and the only viable Class 1
combination.
Review of the CN voting trust by the STB remains pending, and
the STB has already determined a CN-KCS combination would be
reviewed under the new merger rules, the first time a Class 1
combination has been evaluated under that regulatory system.
CP-KCS: The only viable Class 1 combination
A CP-KCS
combination would be a positive step toward more competition – not
less – in the freight rail industry and would be better for Amtrak.
It brings more competition among railways and protects obligations
to passenger service.
A CP-KCS combination offers all the same benefits – and more –
to rail shippers and the supply chain as a CN-KCS combination, with
none of the detriments or the need to enforce promises through more
regulation. A CP-KCS combination:
- Creates single line routes to all the markets that a CN-KCS
network would reach.
- Brings new competition to and from Upper Midwest markets
dominated by BNSF or UP that CN-KCS cannot address.
- Creates new competition versus CN that CN-KCS actually
eliminates.
- Has a route network that does not funnel all of its traffic
through the congested Chicago
area.
- Unlocks new capacity for Amtrak passenger service, rather than
interfering with passenger service between Baton Rouge and New
Orleans and south of Chicago.
A CP-KCS combination would enhance competition, create new and
stronger competitive single-line options against existing
single-line routes while taking trucks off the highway. A CP-KCS
combination would maintain all existing freight rail gateways and
maintain competition in the Baton
Rouge to New Orleans
corridor, while creating new north-south lanes between Western Canada, the Upper Midwest and the Gulf
Coast and Mexico.
CP is willing to host intercity passenger rail service between
New Orleans and Baton Rouge, an outcome with far more
operational flexibility and less risk to Louisiana taxpayers. CP has consistently
received an A rating from Amtrak, leading the industry for the
previous five years-plus, in its annual host railroad report card
recognizing its industry-leading on-time performance record. CP is
also the first Class 1 railroad to complete 100 percent
certification of its Amtrak schedules.
Similarly, a CP-KCS transaction would diminish the pressure for
downstream consolidation by preserving the basic six-railroad
structure of the North American rail network: two in the west, two
in the east and two in Canada,
each with access to the U.S. Gulf Coast. By contrast, a CN-KCS
transaction would fundamentally disrupt this balance.
For information on the benefits of a CP-KCS combination, visit
FutureForFreight.com.
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 to Canadian Pacific. Creel-García-Cuéllar, Aiza y
Enríquez, S.C. is serving as Mexican legal counsel to Canadian
Pacific. Stinson LLP is serving as FCC regulatory 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.
Conference Call for Investment Community
CP will host
an investor conference call today, Aug. 10,
2021, at 8:00AM Eastern Time
to discuss this announcement. A live webcast of the call and the
replay will be available on the CP website at investor.cpr.ca. To
listen to the live conference call, dial (877) 325-0004 in the U.S.
or (873) 415-0269 internationally.
A conference call replay will be available on Aug. 10, 2021, at 11:00AM
Eastern Time. To access the replay, dial (800) 585-8367 or
(416) 621-4642 and reference the passcode 1857048.
FORWARD LOOKING STATEMENTS AND INFORMATION
This news
release includes certain forward-looking statements and forward
looking information (collectively, FLI). 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.
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: changes in business
strategies and strategic opportunities; 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;
potential changes in the CP share price; the ability of management
of CP, its subsidiaries and affiliates to execute key priorities;
general North American 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 and the U.S.; North
American and global economic growth; industry capacity; shifts in
market demand; changes in commodity prices and commodity demand;
uncertainty surrounding timing and volumes of commodities being
shipped via CP; 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; sufficiency of CP's budgeted capital
expenditures in carrying out CP's business plan; services and
infrastructure; the satisfaction by third parties of their
obligations to CP; 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 and the U.S.; climate change and the
market and regulatory responses to climate change; anticipated
in-service dates; success of hedging activities; operational
performance and reliability; regulatory and legislative decisions
and actions; 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; and the pandemic created by the outbreak of COVID-19
and resulting effects on CP's business, operating results, cash
flows and/or financial condition, as well as 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 with Canadian and U.S.
securities regulators. Reference should be made to "Risk Factors"
and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Forward-Looking Statements" in CP's
annual and interim reports on Form 10-K and 10-Q. 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.
ADDITIONAL INFORMATION AND WHERE TO FIND IT
CP has
filed a definitive proxy statement with the Securities and Exchange
Commission ("SEC") to be used to solicit votes of the stockholders
of KCS against the proposal to adopt the CN Agreement.
Additionally, in furtherance of CP's proposed transaction with KCS
and subject to future developments, CP (and, if a negotiated
transaction is agreed, KCS) may file one or more proxy statements,
registration statements, prospectuses or other documents with the
SEC or applicable securities regulators in Canada. This news
release is not a substitute for any proxy statement, registration
statement, prospectus or other document CP and/or KCS may file with
the SEC or applicable securities regulators in Canada in connection with the proposed
transaction.
INVESTORS AND STOCKOLDERS OF KCS ARE URGED TO READ THE
DEFINITIVE PROXY STATEMENT, ALONG WITH ANY FUTURE PROXY
STATEMENT(S) AND OTHER PROXY MATERIALS, REGISTRATION STATEMENT(S),
PROSPECTUS(ES) AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC
OR APPLICABLE SECURITIES REGULATORS IN CANADA CAREFULLY IN THEIR ENTIRETY IF AND WHEN
THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT
INFORMATION ABOUT KCS, CP, THE TRANSACTIONS CONTEMPLATED BY THE CN
MERGER AGREEMENT, CP'S PROPOSED TRANSACTION WITH KCS AND RELATED
MATTERS AND DEVELOPMENTS. THE DEFINITIVE PROXY STATEMENT
ALSO INCLUDES INFORMATION ABOUT THE IDENTITY OF THE PARTICIPANTS IN
CP'S PROXY SOLICITATION AND A DESCRIPTION OF THEIR DIRECT OR
INDIRECT INTERESTS THEREIN.
THE DEFINITIVE PROXY STATEMENT AND OTHER MATERIALS FILED WITH
THE SEC ARE AVAILABLE AT NO CHARGE ON THE SEC'S WEB SITE AT
WWW.SEC.GOV. IN ADDITION, INVESTORS AND STOCKHOLDERS MAY
OBTAIN FREE COPIES OF THE DEFINITIVE PROXY STATEMENT AND OTHER
MATERIALS FILED WITH THE SEC ONLINE AT INVESTOR.CPR.CA, OR UPON
REQUEST TO CP'S PROXY SOLICITOR, INNISFREE M&A INCORPORATED, AT (212)
750-5833 OR TOLL-FREE AT (877)
456-3442.
NO OFFER OR SOLICITATION
This news release 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.
ABOUT CANADIAN PACIFIC
Canadian Pacific
(TSX: CP) (NYSE: CP) 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 www.cpr.ca to see the
rail advantages of CP. CP-IR
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SOURCE Canadian Pacific