CN and KCS enter into a definitive merger
agreement to create the premier railway for the 21st century, bring
together highly complementary networks to benefit customers and
enhance competition
Anticipated to be accretive to CN’s Adjusted
Diluted EPS1 in the first full year following CN assuming control
of KCS
Expected EBITDA synergies approaching $1
billion annually, with a significant proportion expected from
converting truck traffic from busy interstates and highways for
better fuel efficiency at a lower cost
CN (TSX: CNR) (NYSE: CNI) and Kansas City Southern (NYSE: KSU)
(“KCS”) today announced that they have entered into a definitive
merger agreement to create the premier railway for the 21st
century.
Under the terms of the agreement, which was unanimously approved
by the Board of Directors of each company, KCS shareholders will
receive $3252 per common share based on CN’s May 13, 2021 offer,
which implies a total enterprise value of $33.6 billion, including
the assumption of approximately $3.8 billion of KCS debt. KCS
shareholders will receive $200 in cash and 1.129 shares of CN
common stock for each KCS common share, with KCS shareholders
expected to own 12.6% of the combined company. This represents an
implied premium of 45% when compared to KCS’ unaffected closing
stock price on March 19, 2021. KCS’ preferred shareholders will
receive $37.50 in cash for each preferred share.
“We are thrilled that KCS has agreed to combine with CN to
create the premier railway for the 21st century. I would like to
thank the numerous stakeholders of both companies who have
demonstrated overwhelming support for this compelling combination,
and we look forward to delivering the many benefits of this
pro-competitive transaction to them. I am confident that together
with KCS’ experienced and talented team, we will meaningfully
connect the continent – enhancing competition, offering more choice
for customers, and driving environmental stewardship and
shareholder value.”
- JJ Ruest, president and chief executive
officer of CN
“As North America’s most customer-focused transportation
provider, we are excited about this combination with CN, which will
provide customers access to new single-line transportation services
at the best value for their transportation dollar, and increase
competition among the Class 1 railroads. Our companies’ cultures
are strongly aligned, and we share a commitment to environmental
stewardship, safe operations, reliable service and outstanding
performance. As a larger continental enterprise with complementary
routes and an enhanced platform for revenue growth, capital
investment, and job creation, we will be positioned to deliver on
the transaction’s powerful synergies which will create new growth
opportunities for our customers, employees, labor partners,
communities and shareholders.”
- Patrick J. Ottensmeyer, president and chief
executive officer of KCS
“KCS is the ideal partner for CN to connect the continent,
helping to drive North American trade and economic prosperity. We
are confident in our ability to gain the necessary regulatory
approvals and complete the combination with KCS, and we look
forward to combining with KCS to create new opportunities, more
choice and a stronger company.”
- Robert Pace, chair of the board of CN
Compelling Strategic and Financial Rationale
Creates the premier railway for the 21st century. The
combination of CN and KCS will further accelerate CN’s
industry-leading growth profile by connecting North America’s
industrial corridor to create new options for shippers and new
revenue for the combined company. A CN-KCS combination will
substantially help realize the many benefits of the USMCA, bringing
it to life in a meaningful way.
Brings together highly complementary networks to benefit
customers. CN and KCS will create a safer, faster, cleaner and
stronger railway that is ideally positioned to support the growth
of an emerging consumption-based economy through better service
options and customer choice.
Enhances competition. This combination will create an
express route that connects the U.S., Mexico and Canada with a
seamless single-owner, single-operator service, and preserves
access to all existing gateways to enhance route choices and ensure
robust price competition.
Delivers significant value to KCS shareholders. CN’s
proposal delivers an implied premium of 45% to KCS shareholders, as
well as participation in the significant upside of the combined
company. Additionally, KCS shareholders will have the ability to
receive the merger consideration immediately upon the closing of
CN’s voting trust, which is expected to be in the second half of
2021. This combination will also significantly expand the combined
company’s total addressable market (“TAM”) – CN and KCS would
target $8 billion of TAM opportunity while supporting growth across
the rapidly growing USMCA network.
Presents compelling synergies and pro-forma financial
metrics. CN currently estimates that the combination would
result in EBITDA synergies approaching $1 billion annually, with
the vast majority of synergies coming from additional revenue
opportunities. CN anticipates the transaction to be accretive to
CN’s adjusted diluted earnings per share in the first full year
following CN assuming control of KCS.
Accelerates innovation. CN and KCS share cultures that
value safety, service and environmental stewardship. CN and KCS
will accelerate innovation and investment as CN brings its
industry-leading safety technology and fuel efficiency to the KCS
network.
Yields demonstrable benefits for the environment. The
combination will yield demonstrable benefits for the environment by
converting significant volumes of truck traffic onto rails,
delivering better fuel efficiency at lower cost. CN has the ability
to remove more than 300 trucks from the road with every additional
freight train. Because trains are 4 to 5 times more fuel-efficient
than trucks, the combined company will also have an opportunity to
realize a 75% reduction in greenhouse gas emissions, resulting in
cleaner air for local communities along CN’s line. While preventing
thousands of tons of emissions from entering the atmosphere every
day, the expected conversion of truck traffic to rails will also
reduce traffic congestion in these regions.
Creates opportunities for local communities. Upon the
closing of the transaction, CN will maintain corporate headquarters
in Montreal, Canada, and establish Kansas City, Missouri, as the
combined company’s United States headquarters. The Mexico
headquarters will remain in Mexico City and the operations center
in Monterrey. CN will make significant infrastructure investments
in key communities across the new network, including Illinois,
Missouri, Michigan, Louisiana and Texas, meaning more economic
opportunity and more jobs.
Financing
The cash portion of the consideration will be funded through a
combination of cash-on-hand and approximately $19 billion of new
debt. Upon closing of the transaction and including the assumption
of approximately $3.8 billion of KCS debt, we expect to have
outstanding debt of approximately $33 billion, representing a
leverage ratio of 4.5x pro forma 2021 EBITDA3, and we expect to
maintain an investment grade credit rating. Based on the proposed
exchange ratio and CN’s current quarterly dividend of C$0.615 per
CN share, KCS shareholders are expected to receive the equivalent
of $2.30 in annual dividends per KCS share.
Approvals and Timing
CN and KCS are confident in their ability to obtain all
necessary regulatory approvals, including from the Surface
Transportation Board (“STB”) and the Federal Economic Competition
Commission (COFECE) and Federal Telecommunications Institute (IFT)
in Mexico.
CN has proposed a “plain vanilla” voting trust. Upon KCS
shareholder approval of the transaction, and satisfaction of
customary closing conditions, CN will acquire KCS shares and place
them into the voting trust. KCS shareholders will receive the
merger consideration immediately upon the closing of CN’s voting
trust, which is expected to be in the second half of 2021.
Following this step, the STB and other regulatory authorities
must approve CN’s control of KCS. The completion of the transaction
is expected to take place in the second half of 2022. Upon
completion, CN and KCS will begin the integration process to
realize the significant benefits of the combination for their
stakeholders.
For more information on CN’s acquisition of KCS, please visit
www.ConnectedContinent.com.
Advisors
J.P. Morgan and RBC Capital Markets are acting as CN’s financial
advisors, and Centerview Partners LLC is also serving as a
financial advisor. Cravath, Swaine & Moore LLP, Sidley Austin
LLP, Norton Rose Fulbright LLP, Torys LLP, Agon and Stikeman Elliot
LLP are providing legal counsel to CN.
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.
About CN
CN is a world-class transportation leader and trade-enabler.
Essential to the economy, to the customers, and to the communities
it serves, CN safely transports more than 300 million tons of
natural resources, manufactured products, and finished goods
throughout North America every year. As the only railroad
connecting Canada’s Eastern and Western coasts with the U.S. South
through a 19,500-mile rail network, CN and its affiliates have been
contributing to community prosperity and sustainable trade since
1919. CN is committed to programs supporting social responsibility
and environmental stewardship.
About Kansas City Southern
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.
Forward-Looking Statements
Certain statements included in this news release constitute
“forward-looking statements” within the meaning of the United
States Private Securities Litigation Reform Act of 1995 and under
Canadian securities laws, including statements based on
management’s assessment and assumptions and publicly available
information with respect to KCS, regarding the proposed transaction
between CN and KCS, the expected benefits of the proposed
transaction and future opportunities for the combined company. By
their nature, forward-looking statements involve risks,
uncertainties and assumptions. CN cautions that its assumptions may
not materialize and that current economic conditions render such
assumptions, although reasonable at the time they were made,
subject to greater uncertainty. Forward-looking statements may be
identified by the use of terminology such as “believes,” “expects,”
“anticipates,” “assumes,” “outlook,” “plans,” “targets,” or other
similar words.
Forward-looking statements are not guarantees of future
performance and involve risks, uncertainties and other factors
which may cause actual results, performance or achievements of CN,
or the combined company, to be materially different from the
outlook or any future results, performance or achievements implied
by such statements. Accordingly, readers are advised not to place
undue reliance on forward-looking statements. Important risk
factors that could affect the forward-looking statements in this
news release include, but are not limited to: the outcome of the
proposed transaction between CN and KCS; the parties’ ability to
consummate the proposed transaction; the conditions to the
completion of the proposed transaction; that the regulatory
approvals required for the proposed transaction may not be obtained
on the terms expected or on the anticipated schedule or at all;
CN’s indebtedness, including the substantial indebtedness CN
expects to incur and assume in connection with the proposed
transaction and the need to generate sufficient cash flows to
service and repay such debt; CN’s ability to meet expectations
regarding the timing, completion and accounting and tax treatments
of the proposed transaction; the possibility that CN may be unable
to achieve expected synergies and operating efficiencies within the
expected time-frames or at all and to successfully integrate KCS’
operations with those of CN; that such integration may be more
difficult, time-consuming or costly than expected; that operating
costs, customer loss and business disruption (including, without
limitation, difficulties in maintaining relationships with
employees, customers or suppliers) may be greater than expected
following the proposed transaction or the public announcement of
the proposed transaction; the retention of certain key employees of
KCS may be difficult; the duration and effects of the COVID-19
pandemic, general economic and business conditions, particularly in
the context of the COVID-19 pandemic; industry competition;
inflation, currency and interest rate fluctuations; changes in fuel
prices; legislative and/or regulatory developments; compliance with
environmental laws and regulations; actions by regulators; the
adverse impact of any termination or revocation by the Mexican
government of KCS de México, S.A. de C.V.’s Concession; increases
in maintenance and operating costs; security threats; reliance on
technology and related cybersecurity risk; trade restrictions or
other changes to international trade arrangements; transportation
of hazardous materials; various events which could disrupt
operations, including illegal blockades of rail networks, and
natural events such as severe weather, droughts, fires, floods and
earthquakes; climate change; labor negotiations and disruptions;
environmental claims; uncertainties of investigations, proceedings
or other types of claims and litigation; risks and liabilities
arising from derailments; timing and completion of capital
programs; and other risks detailed from time to time in reports
filed by CN with securities regulators in Canada and the United
States. Reference should also be made to Management’s Discussion
and Analysis in CN’s annual and interim reports, Annual Information
Form and Form 40-F, filed with Canadian and U.S. securities
regulators and available on CN’s website, for a description of
major risk factors relating to CN. Additional risks that may affect
KCS’ results of operations appear in Part I, Item 1A “Risks Related
to KCS’s Operations and Business” of KCS’ Annual Report on Form
10-K for the year ended December 31, 2020, and in KCS’ other
filings with the U.S. Securities and Exchange Commission
(“SEC”).
Forward-looking statements reflect information as of the date on
which they are made. CN assumes no obligation to update or revise
forward-looking statements to reflect future events, changes in
circumstances, or changes in beliefs, unless required by applicable
securities laws. In the event CN does update any forward-looking
statement, no inference should be made that CN will make additional
updates with respect to that statement, related matters, or any
other forward-looking statement.
Non-GAAP Measures
CN reports its financial results in accordance with United
States generally accepted accounting principles (GAAP). CN also
uses non-GAAP measures in this news release that do not have any
standardized meaning prescribed by GAAP. This news release also
includes certain forward looking non-GAAP measures or discussions
of such measures (EPS, Adjusted Diluted EPS, EBITDA and a leverage
ratio being adjusted debt to adjusted EBITDA). It is not
practicable to reconcile, without unreasonable efforts, these
forward looking measures to the most comparable GAAP measures
(diluted EPS, net income and long term debt to net income ratio,
respectively), due to unknown variables and uncertainty related to
future results. Please see note on Forward-Looking Statements above
for further discussion.
No Offer or Solicitation
This news release does not constitute an offer to sell or the
solicitation of an offer to buy any securities or a solicitation of
any vote or approval, nor shall there be any sale of securities in
any jurisdiction in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the
securities laws of any such jurisdiction. No offer of securities
shall be made except by means of a prospectus meeting the
requirements of Section 10 of the Securities Act of 1933, as
amended.
Additional Information and Where to Find It
In connection with the proposed transaction, CN will file with
the SEC a registration statement on Form F-4 to register the shares
to be issued in connection with the proposed transaction. The
registration statement will include a preliminary proxy statement
of KCS which, when finalized, will be sent to the stockholders of
KCS seeking their approval of the merger-related proposals. This
news release is not a substitute for the proxy statement or
registration statement or other document CN and/or KCS may file
with the SEC or applicable securities regulators in Canada in
connection with the proposed transaction.
INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE PROXY
STATEMENT(S), REGISTRATION STATEMENT(S), TENDER OFFER STATEMENT,
PROSPECTUS 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 CN, KCS AND THE PROPOSED
TRANSACTIONS. Any definitive proxy statement(s), registration
statement or prospectus(es) and other documents filed by CN and KCS
(if and when available) will be mailed to stockholders of CN and/or
KCS, as applicable. Investors and security holders will be able to
obtain copies of these documents (if and when available) and other
documents filed with the SEC and applicable securities regulators
in Canada by CN free of charge through at www.sec.gov and
www.sedar.com. Copies of the documents filed by CN (if and when
available) will also be made available free of charge by accessing
CN’s website at www.CN.ca. Copies of the documents filed by KCS (if
and when available) will also be made available free of charge 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.
Participants
This news release is neither a solicitation of a proxy nor a
substitute for any proxy statement or other filings that may be
made with the SEC and applicable securities regulators in Canada.
Nonetheless, CN, KCS, and certain of their directors and executive
officers and other members of management and employees may be
deemed to be participants in the solicitation of proxies in respect
of the proposed transactions. Information about CN’s executive
officers and directors is available in its 2021 Management
Information Circular, dated March 9, 2021, as well as its 2020
Annual Report on Form 40-F filed with the SEC on February 1, 2021,
in each case available on its website at www.CN.ca/investors/ and
at www.sec.gov and www.sedar.com. Information about KCS’ 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. Additional
information regarding the interests of such potential participants
will be included in one or more registration statements, proxy
statements, tender offer statements or other documents filed with
the SEC and applicable securities regulators in Canada if and when
they become available. These documents (if and when available) may
be obtained free of charge from the SEC’s website at www.sec.gov
and from www.sedar.com, as applicable.
_______________ 1 The combination is expected to be accretive to
CN’s Adjusted Diluted EPS, excluding incremental
transaction-related amortization, in the first full year following
CN’s acquisition of control of KCS, and is expected to generate
double-digit accretion upon the full realization of synergies
thereafter. 2 All figures in U.S. dollars, except where noted. All
conversions between Canadian dollars and U.S. dollars are based on
a 0.827 foreign exchange rate as of May 12, 2021. Where applicable,
figures are based on the CN closing share price on the NYSE of
$110.76 as of May 12, 2021. 3 Represents adjusted debt-to-adjusted
EBITDA multiple, assuming closing into trust at end of 2021.
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version on businesswire.com: https://www.businesswire.com/news/home/20210521005364/en/
Media: CN Canada
Mathieu Gaudreault CN Media Relations & Public Affairs (514)
249-4735 Mathieu.Gaudreault@cn.ca
Longview Communications & Public Affairs Martin Cej (403)
512-5730 mcej@longviewcomms.ca
United States Brunswick Group Jonathan Doorley / Andrew
Spinelli (917) 459-0419 / (312) 468-7431
jdoorley@brunswickgroup.com aspinelli@brunswickgroup.com
Media: KCS C. Doniele
Carlson KCS Corporate Communications & Community Affairs (816)
983-1372 dcarlson@kcsouthern.com
Joele Frank, Wilkinson Brimmer Katcher Tim Lynch / Ed Trissel
(212) 355-4449
Investment Community: CN
Paul Butcher Vice-President Investor Relations (514) 399-0052
investor.relations@cn.ca
Investment Community: KCS
Ashley Thorne Vice President Investor Relations (816) 983-1530
athorne@kcsouthern.com
MacKenzie Partners, Inc. Dan Burch / Laurie Connell (212)
929-5748 / (212) 378-7071
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