Stock and Cash Transaction Represents an
Enterprise Value of Approximately $31
Billion
Expected to Create Annualized Synergies of
Approximately $1 Billion within Three
Years
Historic Combination Enhances Competition,
Creates New Options for Customers, and Supports Economic Growth in
North America
Companies to Host Investor Conference Call
Thursday at 8 a.m. ET
CALGARY, AB and
KANSAS CITY, Mo, Sept. 15, 2021 /PRNewswire/ - 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$31
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 $300 per
share, representing a 34 percent premium, based on the CP closing
price on Aug. 9, 2021, the date prior
to which CP submitted a revised offer to acquire KCS, and KCS'
unaffected closing price on March 19,
20212.
"Our path to this historic agreement only reinforces our
conviction in this once-in-a-lifetime partnership," said CP
President and Chief Executive Officer Keith
Creel. "We are excited to get to work bringing these two
railroads together. By combining, we will unlock the full potential
of our networks and our people while providing industry-best
service for our customers. This perfect end-to-end combination
creates the first U.S.-Mexico-Canada
rail network with new single-line offerings that will deliver
dramatically expanded market reach for CP and KCS customers,
provide new competitive transportation options, and support North
American economic growth."
"We are glad to be partnering with CP to create a railroad that
is able to compete by providing the best value for the
transportation dollar," said KCS President and Chief Executive
Officer Patrick J. Ottensmeyer. "The
CP-KCS combination will not only benefit customers, labor partners,
and shareholders through new, single-line transportation services,
attractive synergies and complementary routes, it will also benefit
KCS and our employees by enabling us to become part of a growing
and truly North American continental enterprise."
While remaining the smallest of six U.S. Class 1 railroads by
revenue, the combined company would have 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. The CP-KCS combination is expected to create
jobs across the joined network. Additionally, the companies expect
efficiency and service improvements to achieve meaningful
environmental benefits.
_______________________
|
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 Aug. 9,
2021.
|
Transaction to Expand Options and Efficiencies for
Customers
A CP-KCS combination would provide unprecedented reach via new
single-line hauls across a combined network, offering:
- New single-line competitive options for domestic intermodal
shipments between Mexico, the U.S.
Midwest, and Canada, providing a
truck competitive product for time-sensitive shipments in the
high-value parts, perishables, and expedited markets.
- New single-line hauls linking key automotive manufacturing and
distribution centers in Mexico,
the U.S. Midwest, and Canada,
capitalizing on CP's best-in-class automotive compound
network.
- New single-line routes linking energy, chemical, and
merchandise shippers to more quickly and efficiently connect origin
and destination facilities and reach new markets and global
consumers.
- Unmatched access to Atlantic, Gulf, and Pacific ports, linking
international intermodal shippers with North America's largest consumer markets
providing new optionality, capacity, and resiliency.
- New single-line routes allowing the efficient flow of
agricultural products from CP's origin-rich franchise to KCS'
destination-rich franchise, generating new optionality for shippers
and receivers.
- Extended reach for short line and regional railroads coupled
with new optionality for non-rail served customers via our
extensive transload network.
Importantly, customers would not experience a reduction in
independent railroad choices as a result of the transaction. CP-KCS
have committed to keep all existing freight rail gateways open on
commercially reasonable terms, while simultaneously competing
aggressively to attract traffic via new single-line north-south
lanes between Canada, the Upper
Midwest and the Gulf Coast, Texas,
and Mexico.
A CP-KCS combination would preserve the six-railroad structure
of the North American Class 1 rail network: two in the west, two in
the east and two in Canada, each
with access to the U.S. Gulf Coast. The two companies once combined
would remain the smallest of the Class 1 carriers.
Improving Highway Traffic, Environmental Sustainability, and
Safety
The new single-line routes made possible by the transaction are
expected to shift trucks off crowded U.S. highways, lowering
emissions and reducing the need for public investments in road and
highway bridge repairs. 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. The
synergies created by this combination are expected to take tens of
thousands of trucks off the highways annually.
CP is committed to sustainability and is currently developing
North America's first line-haul
hydrogen-powered locomotive. Additionally, the combined company
would maintain both CP and KCS' pledges to improve fuel efficiency
and lower emissions in-line with the Paris Agreement to support a
more sustainable North American supply chain.
Creating Value for KCS and CP Shareholders
Following the closing into a voting trust, common shareholders
of KCS will receive 2.884 CP shares 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 $300 per share, representing a 34
percent premium, based on the CP closing price on August 9, 2021 and KCS' unaffected closing price
on March 19, 20213.
Immediately following the closing into trust, KCS common
shareholders are expected to own 28 percent of CP's outstanding
common shares, providing the ability to participate in the upside
of both companies' growth opportunities. Following final regulatory
approval by the U.S. Surface Transportation Board ("STB"), KCS
shareholders would also reap the benefits of synergies resulting
from the combination.
The combined growth strategies of the two fastest-growing Class
1s will result in new efficiencies for customers and improved
on-time performance under their respective Precision Scheduled
Railroading programs. The combined company is expected to create
annualized synergies of approximately $1
billion over three years.
The combination is expected to be accretive to CP's adjusted
diluted EPS4 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. Consistent with the previously announced
transaction, the cash portion will be funded through a combination
of cash-on-hand and raising approximately $8.5 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
billion.
Pro forma for the transaction, CP estimates its leverage ratio
against 2021E street consensus EBITDA to be approximately 3.9x with
the assumption of KCS debt and issuance of new acquisition-related
debt. In order to manage this leverage effectively, CP will
continue to temporarily suspend 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 24 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.
_______________________
|
3 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 Aug. 9, 2021.
|
4 Accretion based on adjusted diluted
EPS excluding one-time advisory, financing, and integration costs
as well as incremental transaction-related amortization.
|
Strong Stakeholder Support for CP-KCS
More than 1,000 stakeholders – including railroad labor unions,
shippers, and community leaders – have written letters to the STB
supporting CP's proposed combination with KCS. These letters
emphasize the enhanced competition and unsurpassed levels of
service, safety and economic efficiency that the transaction will
bring for shippers and communities across the U.S., Mexico, and Canada that a CP-KCS combination offers.
Clear Path to Complete Transaction and Merger
On May 6, 2021, the STB approved
the use of a voting trust for a planned CP-KCS merger, and the
pertinent circumstances surrounding this new agreement between CP
and KCS have not changed relative to those underlying the STB's
decision approving a trust. To close into voting trust, the
transaction requires approval from shareholders of both companies
along with satisfaction of customary closing conditions, including
Mexican regulatory approvals. CP would then acquire KCS and place
the KCS shares into the voting trust, at which point KCS
shareholders would receive 2.884 CP shares and $90 in cash for each KCS common share held. The
companies expect the transaction to close and KCS shareholders to
receive their consideration in Q1 2022.
CP's ultimate acquisition of control of KCS' U.S. railways is
subject to the approval of the STB. In April, the STB decided that
it would review the CP-KCS combination under the merger rules in
existence prior to 2001 and the waiver granted to KCS in 2001 to
exempt it from the 2001 merger rules. In August, the STB reaffirmed
that the pre-2001 rules would govern its review of the CP-KCS
transaction.
The STB review of CP's proposed control of KCS is expected to be
completed in the second half of 2022. Upon obtaining control
approval, the two companies will be integrated fully over the
ensuing three years, unlocking the benefits of the combination.
Board, Management, and Headquarters
Following STB approval of the CP's control of KCS, 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,
Missouri will be 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
Thursday, Sept. 16, at 8 a.m. ET to discuss this 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 (877) 830-2586 in the U.S. or (785)
424-1734 internationally, passcode 74335.
A conference call replay will be available for one week
following the call and can be accessed by dialing (800) 753-5212
(no passcode needed).
For information on the benefits of a CP-KCS combination, visit
FutureForFreight.com.
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.
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;
changes in business strategy 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 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 Mexico; 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; 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 budgeted capital
expenditures in carrying out business plans; services and
infrastructure; the satisfaction by third parties of their
obligations; 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 Mexico; 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 Mexican government of Kansas City
Southern de Mexico, 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
its variants, 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. 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 and KCS'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.
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 www.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 with other North American rail partners are primary
components of a unique railway system, 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, STOCKHOLDERS 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 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.
NON-GAAP MEASURES
Although this news release includes forward-looking non-GAAP
measures (adjusted diluted EPS and 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 and Net
income, respectively), due to unknown variables and uncertainty
related to future results. Please see Note on forward-looking
statements above for further discussion.
PARTICIPANTS IN THE SOLICITATION OF PROXIES
This news release 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.
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SOURCE Canadian Pacific