STB approval of a CN-KCS voting trust would
instantly reduce competition, create immediate pressure for
downstream consolidation
A CN-KCS combination is not in public
interest, while CP-KCS remains only viable, pro-competition Class 1
combination
CALGARY, AB, June 29, 2021 /PRNewswire/ - Canadian
Pacific Railway Limited (TSX: CP) (NYSE: CP) ("CP") has filed a
reply to Canadian National ("CN") and Kansas City Southern's
("KCS") joint motion for voting trust approval with the Surface
Transportation Board ("STB"). In urging the STB to reject CN and
KCS' voting trust application, CP detailed the significant public
interest harm associated with a voting trust and potential CN-KCS
combination.
"Hundreds of shippers, governments and other stakeholders across
North America have written the
Surface Transportation Board to warn about the potential public
interest harms that would come from allowing CN to close into a
trust," said Keith Creel, CP
President and Chief Executive Officer. "Only by rejecting the CN
voting trust can the board preserve its ability to fully review the
public consequences of CN's proposed acquisition of KCS, without
the risk of any anti-competitive harms that a voting trust would
set in motion."
This harm, which would remain regardless of whether the STB
ultimately permits CN to merge with KCS, includes:
- A CN-KCS combination would reduce freight transportation
service options for over 340 shippers across the United States. Contrary to the claims
of CN executives, CN and KCS compete directly for significant rail
traffic, including in cities such as Omaha/Council Bluffs, Neb./Ia.; St. Louis, Mo.; and Mobile, Al. Given the substantial overlap of
the CN and KCS networks, the resulting reduction in competition
from a CN-KCS merger would have major implications for shippers and
the industry. Importantly, approval of a voting trust for a CN-KCS
merger would dramatically reduce the two companies' incentives to
compete, even if KCS' management stayed scrupulously independent.
Even if CN ultimately accepts conditions designed to remediate some
of these competitive harms, those "remedies" would only become
effective in 2023 or later, long after KCS will have been
sold to CN.
- If CN and KCS enter into trust, CN would immediately take on
over $19 billion of additional debt,
creating significant risks to its business, employees and the
future of North American rail infrastructure. The 45 percent
premium CN is offering to acquire KCS would require CN to find ways
to recoup this substantial investment. CN is unlikely to achieve
its optimistic forecasts about how quickly it will pay down this
debt, leading to potential underinvestment in its rail
infrastructure and/or price hikes for shippers and a precarious
financial position for CN. These concerns prompted TCI Fund
Management, a major CN shareholder, to urge CN to abandon its
"ill-advised misadventure" to acquire KCS.
If CN can use a voting trust, the STB would have no meaningful
opportunity to assess the public interest costs associated with
this indebtedness or the risks to CN and the public.
- Allowing CN to use a voting trust to acquire KCS would
create immediate pressure for further downstream consolidation in
the railroad industry. As this case is the first-ever test of
the STB's 2001 merger rules, the STB's decision carries significant
implications for the industry. The STB's approval of a voting trust
would set a precedent for the routine use of voting trusts in
subsequent rail merger proposals upon the demand of target
shareholders.
Equally important, CN's ability to acquire KCS shares – and hold
them in trust until the end of 2024 as CN plans – would force CP
and other railroads to reassess future strategic options, likely
leading to further attempts at consolidation among Class 1
railroads.
- Approval of a CN voting trust eliminates the potential for
the CP-KCS combination to create a new north-south rail artery that
will bring new competitive options to shippers in America's
Heartland, between Canada and the
U.S. Gulf Coast. A CN-KCS combination prevents CP from making
the investments that will transform its CP-KCS route via
Kansas City, permanently
squandering a once-in-a-lifetime opportunity to inject new
competition into America's rail network, and making KCS's mainline
south of Kansas City a mere
"redundancy" line in CN's system.
- Against this harm, CN has not put forward any public
benefits associated with its use of a voting trust. CN and
its supporters urge approval of a voting trust to "allow KCS to
choose the bid it judges to be best for its shareholders." This
"shareholder-first" argument would elevate private benefits to
shareholders over the public interest. The desire to maximize
returns to KCS' shareholders is not a public benefit.
Approving a trust on this basis would make voting trusts routine,
contrary to the STB's 2001 major merger rules.
These concerns echo those of hundreds of stakeholders –
including railroad labor unions, shippers and community leaders –
who have written letters to the STB opposing a CN-KCS voting trust
or merger. More than 300 letters have been filed opposing the CN
voting trust. Approximately 1,200 letters from across
North America have been filed in
support of CP's proposed combination with KCS or in opposition to
the CN proposal because it is not in the public interest.
CP-KCS: The Only Viable Class 1 Combination
As
previously announced, CP is continuing 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
in the event CN is unable to acquire control of KCS.
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.
A CP-KCS transaction would raise none of the
anti-competitive concerns cited by hundreds of shippers and other
stakeholders. Instead, CP-KCS would enhance competition,
create new and stronger competitive single-line options against
existing single-line routes, as well as taking trucks off the
highway. CP-KCS would maintain all existing freight rail gateways
and maintains competition in the Baton
Rouge to New Orleans
corridor, while creating completion a new north-south lanes between
Western Canada, the Upper Midwest
and the Gulf Coast and Mexico.
Additionally, 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.
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 more information on the benefits of a CP-KCS combination and
the risks that a CN-KCS transaction would pose to the railway
industry and North America, visit
FutureForFreight.com.
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.
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