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
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%
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.
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%
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.
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.
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. 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.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20210915005688/en/
Canadian Pacific Media Patrick Waldron Tel: 403-852-8005
Patrick_Waldron@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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