Letter Outlines the Breadth of Horizontal
Competitive Overlaps Between Canadian National and KCS
Highlights Regulatory Issues with CN's
Proposal and its Expected Negative Impact on STB's Voting Trust
Analysis
CALGARY, AB, April 26, 2021 /PRNewswire/ - Today,
Canadian Pacific Railway Limited (TSX: CP) (NYSE: CP) announced
that it recently sent a letter to the President and Chief Executive
Officer of Kansas City Southern ("KCS") regarding the
anti-competitive impacts of the proposed Canadian National
transaction with KCS.
The full text of the April 23,
2021 letter is below:
Pat Ottensmeyer
President and CEO
Kansas City Southern
427 West 12th Street
Kansas City, Missouri 64105
Dear Pat:
I am writing to address some of the statements Canadian National
has publicized over the past 24 hours concerning an issue that I
expect will weigh heavily as your Board gives due consideration to
CN's proposal. The misrepresentations made by CN's CEO have
led us to, once again, respond with the undeniable facts. Either
Mr. Ruest does not fully understand his proposed transaction or he
doesn't want to reveal what he knows. Either way, the bond and
trust CP has built with you, KCS as a whole, and the communities we
collectively serve, is too important to ignore.
In its letter this morning to the STB in our CP/KCS docket, CN
has now discussed in more detail its view of the competitive
impacts of a hypothetical CN/KCS transaction and how CN plans to
remedy those impacts. I am confident that you and your Board
have a thorough understanding of all of the dimensions of
competition between KCS and CN, but I thought it would be useful to
place some of those issues in the context of how we strongly
believe the STB will evaluate the public interest consequences were
a CN proposal ever to proceed through the regulatory process.
The Breadth of Horizontal Competitive Overlaps Between KCS
and CN
I am sure I do not need to belabor the extent of the competitive
overlaps between KCS and CN. As you know, the competition
between KCS and CN is not limited to a "handful" of shippers as CN
suggests. KCS and CN serve the same shippers, the same
cities, the same corridors, and the same regions across much of
KCS's U.S. network. Your counsel will be able to confirm that
analysis of available data shows that combining KCS with CN will
reduce shippers' competitive options across an extensive number of
origin-destination pairs. That is not just because KCS and CN
serve shippers in common, but because your networks connect the
South Central States with the U.S. Midwest, Canada, and other regions, providing
competitive routing options that will be extinguished by the CN/KCS
proposal. The map below illustrates just some of the obvious
routing overlaps: examples like New
Orleans-Chicago/Detroit/Twin
Cities, Jackson-Chicago/Detroit/Twin
Cities, Baton
Rouge-Chicago/Detroit/Twin
Cities, St
Louis-Baton
Rouge/New Orleans,
Alberta-Baton Rouge, Detroit-Dallas/Jackson, and countless others (Figure 1).
These reductions in competing routes are not solely the product
of individual shippers that are dual served, contrary to CN's
suggestion. They flow from the broadly parallel route
structure of CN and KCS between Springfield, Illinois and New
Orleans.
The loss of horizontal competition from a CN/KCS transaction
goes farther than this, to include lost options for shippers on
connecting shortlines, lost geographic competition, and lost
build-in/build-out opportunities. For example, CN and KCS
account for more than half of all rail freight revenue for traffic
to/from Mississippi. Even where there is no direct shipper
overlap, the two railroads move the same commodities (like forest
products and grain) to/from alternative origins or destinations in
Mississippi and throughout KCS's
South Central United States service territory. The close
proximity of KCS and CN's lines between Baton Rouge and New
Orleans not only mean numerous shippers will lose one of
their current rail options, but also extinguishes the opportunity
to discipline post-merger CN by building in or out to another
railroad (as has occurred in the past).
None of this has escaped the attention of the shipper
community: Cowen released a survey today of over
100 shippers and reports that 45% had a negative view of the CN
merger (vs 18% of ours in Cowen's previous survey), and that 20%
said that CN/KCS would "cause them to lose a rail shipping
option."
CN appears to believe that the only transportation competition
that matters in North America is
competition from trucks and the existence of at least two railroads
serving individual shippers. As I am confident your counsel
will confirm, this is not how the STB will view railroad
competition under the 2001 merger rules.
One illustration of CN's overly narrow perspective is the
diagram on its own "Connected Continent" website showing supposedly
new "single-line service" between Kansas
City and the ports of New
Orleans and Mobile, Alabama. CN's diagram is
reproduced below (Figure 2):
This diagram is stunningly ignorant of the basic competitive
landscape. It simply ignores that KCS already connects
Kansas City with both Mobile and
New Orleans via single-line
service. Once that fact is understood, it is also obvious
that the CN/KCS transaction would directly reduce rail competition
at both of these ports, as the corrected diagram makes clear
(Figure 3):
CN's April 23 letter to the STB
suggests that this loss of competition to the Port of Mobile is
meaningless, because "the Port is served by multiple other
railroads, including Class Is." CN Apr. 23 Letter at 3. I doubt shippers and the STB
will see it that way.
Another reflection of CN's misguided view of competition is its
effort to wave away competitive issues by saying that CN will work
with "dual-served" customers to "ensure they would not become
sole-served as a result of a CN-KCS transaction." CN
Apr. 23 Letter at 3; see also
id. ("If KCS chooses to partner with CN, CN will propose
effective solutions, working closely with these customers to ensure
that no customer will become sole served."). With respect,
this approach ignores the approach to competition that the STB
spelled out when it adopted its 2001 merger rules. For
example, as the 2001 rules explain, "the Board believes additional
consolidation in the industry is also likely to result in a number
of anticompetitive effects, such as loss of geographic competition,
that are increasingly difficult to remedy directly or
proportionately." 49 C.F.R. § 1180.1(c).
CN may think it can persuade the STB to allow the CN transaction
to eliminate KCS as an independent competitor in North South (and
East-West) routes, and across the broadly overlapping South Central
region, based on discrete remedies for a handful of "2-to-1"
shippers. But we think that assessment is extraordinarily out
of touch with the Board's 2001 rules and today's regulatory
landscape. The fact that the CN and KCS systems parallel one
another south of Springfield and
Kansas City (as shown in more
focus in the map below) foreshadows regulatory disapproval,
extensive and complex competition-enhancing conditions, or the
dismemberment of KCS as CN ultimately rationalizes these parallel
lines and terminals (Figure 4).
Impact of Competitive Overlap on STB's Voting Trust
Analysis
As you and your Board evaluates CN's proposal, we understand
that a likely gating question is whether CN would be allowed to
close into trust. CN has made clear that it will proceed
under the 2001 merger rules and will soon be filing a motion
seeking "public interest" review of its proposed use of a voting
trust. On this issue too, CN's analysis of the issues is out
of touch with reality.
CN suggests that the only issues the STB will view as relevant
are (a) whether the trust agreement itself insulates KCS from
control by CN and (b) whether KCS can be sold if the merger is
disapproved. CN Notice of Intent at 7-8. CN suggests
that on these issues there is no difference between its proposal
and the voting trust proposal we have agreed upon. With
respect, CN is missing two big parts of the regulatory picture.
First, any public interest review will certainly consider the
likelihood that, at the end of the regulatory review process, KCS
would become part of the acquirer's system as planned. For
all of the reasons covered above, along with many others (perhaps
most importantly the destabilizing effect of CN's transaction on
industry structure and the potential for downstream consolidation)
the back-end regulatory risks associated with CN's proposal will
cause the STB to be reluctant to allow KCS to go into trust at the
front end.
Second, the head-to-head competition that even CN acknowledges
must be remedied makes the use of a voting trust uniquely
inappropriate in a CN/KCS transaction. DOJ's comments on the
CP/KCS voting trust proposal emphasized a specific source of harm
to competition from the use of voting trusts that applies uniquely
to CN's proposal (and not to CP's) – namely that the incentives of
the railroads to compete will be dampened while one (KCS) is
already in trust and the other (CN) already receives the benefit of
that ownership through its ownership of shares. DOJ Comment
at 3-4.
In light of the extensive competition between KCS and CN – which
you are more keenly aware of than I – DOJ and the STB will see this
as a serious concern. And none of the competitive remedies
that CN might ultimately devise can possibly eliminate this harm,
because – as CN acknowledges – they would come at the end of the
regulatory process, not when KCS is acquired and its shares go into
trust. CN Analyst Call Tr. 15 (Mr. Finn) ("we can address
them as they arise … and the decision by the STB ultimately will
impose those conditions, if required").
Pat, I understand that you and your Board must give the CN
proposal all of the consideration that it deserves. But I
submit that when you consider the regulatory issues CN's proposal
raises – and our agreement does not – you will see that CN's
proposal is an illusory one that should not distract KCS from the
once-in-a lifetime partnership that our mutually agreed transaction
represents.
These two companies have long, proud histories and an even
brighter future, together.
Respectfully,
Keith Creel
CP President and CEO
On April 23, 2021, the Surface
Transportation Board confirmed that the waiver it granted
to KCS in 2001 is applicable to the proposed combination of CP-KCS
because it would still result in the smallest Class 1 railroad with
the fewest overlapping routes and be end-to-end in
nature.
For more information on the transaction and the benefits it is
expected to bring to the full range of stakeholders,
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;
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; the previously announced proposed share split of
CP's issued and outstanding common shares and whether it will
receive the requisite shareholder and regulatory approvals;
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; industry capacity; shifts
in market demand; changes in commodity prices; 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; 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 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. 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
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 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 communication 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.
PARTICIPANTS IN THE SOLICITATION OF PROXIES
This communication 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