CN-KCS merger proposal proven illusory as STB
notes significant threats to competition
A CP-KCS combination offers short- and
long-term value with regulatory certainty and CP today has written
KCS board to affirm August 10 CP
offer
CALGARY, AB, Aug. 31, 2021 /CNW/ - Canadian Pacific Railway
Limited (TSX: CP) (NYSE: CP) today said the Surface Transportation
Board's ("STB") decision to refuse Canadian National ("CN") and
Kansas City Southern's ("KCS") joint motion for voting trust
approval is the right one for rail shippers, the freight rail
industry and the North American economy.
"The STB decision clearly shows that the CN-KCS merger proposal
is illusory and not achievable," said Keith
Creel, CP President and CEO. "Knowing this, we believe the
August 10 CP offer to combine with
KCS, which recognizes the premium value of KCS while providing
regulatory certainty, ought to be deemed a superior proposal.
Today, we have notified the KCS Board of Directors that our
August 10 offer still stands to bring
this once-in-a lifetime partnership together."
The text of the letter to the KCS Board of Directors can be
found below in this news release.
"CP has always maintained that the CN-KCS combination and the
proposed CN voting trust is not in the public interest," Creel
said. "Hundreds of rail shippers, community leaders, elected
officials and other stakeholders have voiced those same concerns
and today the STB agreed."
CP-KCS is the only true end-to-end Class 1 combination that
serves the public interest preserving and enhancing competition for
customers and enabling a stronger North American rail network
connecting Canada, the United States and Mexico. CP-KCS is a superior combination that
has a path to approval and deal certainty for the KCS
shareholders.
As previously announced, 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.
KCS stockholder meeting Sept.
3
CP has filed a proxy statement asking stockholders
to vote "AGAINST" the proposed CN-KCS combination at the KCS
stockholders meeting so that KCS stockholders are not locked into
the CN-KCS deal and unable to consider other, better, options. That
includes CP's Aug. 10 offer submitted
to KCS. A vote to "ABSTAIN" and vote "AGAINST" are essentially the
same since they both withhold approval of the CN merger
proposal.
The STB decision
In rejecting the proposed CN-KCS
voting trust, the STB recognized the trust was not consistent with
the public interest and the CN-KCS combination is
anticompetitive.
In its decision the STB wrote, "…the Board finds that (CN and
KCS) have not demonstrated that their use of a voting trust would
be consistent with the public interest. Applicants have shown no
benefit from the use of a voting trust to stakeholders other than
KCS and CN. At the same time, the use of a voting trust, in the
context of the impending control application, would raise risks
that threaten to undermine the public interests."
Noting the competitive overlap the CN-KCS merger brings with it,
the STB said "the competitive overlap in (CN and KCS's) networks is
not limited to, and extends beyond, the Baton Rouge-New
Orleans corridor. Applicants operate parallel lines through
the central portion of the United
States and compete for north-south traffic on these lines,
particularly where KCS's network parallels the section of CN's
network that CN acquired from Illinois Central (IC) in 1999."
The decision notes how any CN-KCS combination would have to be
reviewed under the new regulations established in 2001, the first
proposed merger to fall under those rules. The "new regulations
that apply to major transactions such as this one go beyond
preserving competitive options at two-to-one locations and seek to
protect product and geographic competition."
In comparing the CN-KCS combination with the proposed CP-KCS
transaction, the STB said "the two transactions are substantially
different: the proposed CP-KCS transaction … is an end-to-end
merger, whereas, here, the CN system overlaps with that of
KCS."
Conference Call for Investment Community
CP will host
an investor conference call on Sept. 1,
2021, at 9 AM Eastern Time to
discuss the STB decision. A live webcast of the call and the replay
will be available on the CP website at investor.cpr.ca. To
pre-register for the conference call, click here and to listen to
the live conference call, dial (844) 200 6205 in the U.S. or (929)
526 1599 internationally.
A conference call replay will be available until Tuesday, September 7. To access the replay, dial
(866) 813 9403 and reference the passcode 870499.
CP-KCS: The only viable Class 1 combination
While the
CN-KCS merger proposal fails the public interest and competition
tests, a CP-KCS combination would create 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 with none of CN-KCS' harms or
need to enforce promises through 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
CP-KCS would enhance competition, create new and stronger
competitive single-line options against existing single-line routes
while taking trucks off the highway. CP-KCS 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.
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,
visit FutureForFreight.com.
The full text of today's letter to the KCS Board of
Directors:
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 reaffirm our offer ("Offer") for CP to combine with KCS
on the same terms as set forth in our letter dated August 10, 2021.
As we have consistently stated, we have always believed that the
proposed Canadian National Railway Company ("CN")-KCS merger would
not be actionable. Our belief was confirmed today when the Surface
Transportation Board (the "STB") denied approval for CN's proposed
voting trust.
We applaud the KCS Board of Directors for its good judgment in
adjourning the KCS special meeting of stockholders to vote on the
proposed CN merger pending the STB's decision. The adjournment has
helped preserve the KCS stockholders' ability to consider 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.
We are happy to hereby confirm that our Offer still stands and
we are excited to re-engage with KCS to pursue a CP-KCS
combination, which will be transformational for the railroad
industry and serve the best interests of our respective customers,
shareholders and other stakeholders and the North American
economy.
The Offer
The terms of our Offer are repeated 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 (the day prior to our letter from August 10 with our improved terms). 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).
- This Offer shall expire at 11:59
p.m., New York City time,
on September 12, 2021, if KCS has not
delivered evidence to CP by that time that KCS has delivered to CN,
in accordance with the terms of the CN Agreement, a Company
Superior Proposal Notice (as defined in the CN Agreement) advising
CN of its intention to terminate the CN Agreement to accept this
Offer and enter into the Merger Agreement.
- The provisions of Article 8 of the Merger Agreement are
incorporated by reference herein mutatis mutandis, and this
Offer and our other agreements set forth herein shall be governed
by and construed in accordance with such provisions.
Following the closing of the Transaction, KCS stockholders would
own approximately 28% of the combined company (reflecting a 3%
point 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, which,
together with the 3% increased KCS stockholder ownership in the
combined company, offers KCS stockholders further value upside
incremental to the immediate premium under our offer.
We firmly 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 (which CN has been denied) 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 (rules that were
designed to address the exact kinds of threats to competition and
other issues posed by a CN-KCS combination). Indeed, the STB's
decision expressly noted (at 28) that "the competitive overlap in
Applicants' networks is not limited to, and extends beyond, the
Baton Rouge-New Orleans corridor. Applicants operate
parallel lines through the central portion of the United States and compete for north-south
traffic on these lines." We believe that, with the recent STB
decision denying CN's proposed voting trust, the STB's message is
very clear: there is no way to successfully execute the proposed CN
merger and there is no deal or value certainty for the KCS
stockholders should KCS continue to pursue the proposed CN merger
without voting trust approval.
CP is standing by ready and willing to pursue this once-in-a
lifetime partnership together, and we remain committed to
everything this opportunity presents. We look forward to
re-engaging with you to bring together our two companies to serve
the best interests of our shareholders, customers, stakeholders and
the North American railroad industry.
Respectfully yours,
Keith Creel
President and Chief Executive Officer
Canadian Pacific Railway Limited
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 Agreement and Plan of
Merger, dated as of May 21, 2021 (the
"CN Merger Agreement"), by and among CN, Brooklyn Merger Sub, Inc.,
a Delaware corporation and a
direct wholly owned subsidiary of CN, and KCS. 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