CP provides updated outlook capturing
transaction-related financial impacts
CALGARY, AB, Dec. 14, 2021 /CNW/ - Canadian Pacific Railway
Limited (TSX: CP) (NYSE: CP) ("CP") today announced the completion
of its acquisition of Kansas City Southern (NYSE: KSU) ("KCS"). The
transaction represents an enterprise value of approximately
US$31 billion. KCS stockholders will
receive 2.884 CP common shares and US$90 in cash for each share of KCS common stock
held and US$37.50 in cash for each
share of KCS preferred stock held.
Immediately upon the closing of the acquisition, the shares of
KCS were placed into a voting trust with Dave Starling, former KCS President and CEO,
appointed as the Voting Trustee. The Voting Trust, which ensures
KCS will operate independently of CP, will remain in effect until
the U.S. Surface Transportation Board ("STB") issues its decision
on the companies' joint railroad control application. The STB's
approval of CP's control of KCS would create Canadian Pacific
Kansas City Limited ("CPKC"), the only single-line railroad linking
the United States, Mexico and Canada. The STB review of CP's proposed
control of KCS is expected to be completed in the fourth quarter of
2022.
"Today is a historic day for our two iconic companies," said
Keith Creel, CP President and Chief
Executive Officer. "CPKC will become the backbone connecting our
customers to new markets, enhancing competition in the U.S. rail
network, and driving economic growth across North America while delivering significant
environmental benefits. We are excited to reach this milestone on
the path toward creating this unique truly North American
railroad."
"As a Board and management team, we are proud of the countless
contributions and achievements of all those who work for Kansas
City Southern," said Patrick J.
Ottensmeyer, KCS President and Chief Executive Officer. "We
are excited for the possibilities that will open to us through this
combination with CP and we look forward to our next chapter."
Expected benefits from the business combination will not be
realized until the STB approves CP's control of KCS' railroads.
Upon obtaining control approval from the STB, the two companies
expect to achieve full integration over the ensuing three years,
unlocking the benefits of the combination.
For information on the benefits of a CP-KCS combination, visit
FutureForFreight.com.
Financial Implications of Closing into Trust
To fund the cash consideration of the merger, CP's wholly-owned
subsidiary, Canadian Pacific Railway Company sold new debt of
C$2.2 billion and US$6.7 billion, both of which are guaranteed by
CP. The debt transactions closed on Nov. 24,
2021 and Dec. 2, 2021,
respectively. CP expects to incur approximately C$21 million in interest expense in the quarter
from the two issuances.
Today, CP issued 262,597,106 new common shares as the share
consideration under the terms of the merger agreement resulting in
approximately 721.4 million weighted average diluted shares
outstanding in the quarter.
During the period that KCS is held in voting trust, CP will
account for its ownership under the equity method of accounting.
From Dec. 14, 2021, onward, CP will
report KCS' earnings, adjusted for the amortization of the fair
value write-up, on a single line of CP's consolidated statements of
income.
Updated Outlook
Following the impacts of the accelerated timeline of the
transaction closing into trust and the impacts of the extreme
weather in British Columbia, CP
now expects full-year growth in adjusted diluted EPS1,2
in 2021 to be in the high single digits. CP expects full-year
volumes to be approximately flat in 2021, as measured in revenue
ton-miles, compared to 2020.
CP's revised guidance assumes an updated effective tax rate of
approximately 24.0 percent. CP now expects other components of net
periodic benefit recovery to increase by approximately C$45 million versus 2020 and continues to expect
capital expenditures of C$1.55
billion.
1 CP's expectation for high single-digit growth
in 2021 adjusted diluted EPS is relative to 2020's adjusted diluted
EPS of C$3.53. CP's reported diluted
EPS was C$3.59 in 2020.
2 Although CP has provided a forward-looking
non-GAAP measure (adjusted diluted EPS), management is unable to
reconcile, without unreasonable efforts, the forward-looking
adjusted diluted EPS to the most comparable GAAP measure (diluted
EPS), due to unknown variables and uncertainty related to future
results. These unknown variables may include unpredictable
transactions of significant value. In recent years, CP has
recognized acquisition-related costs (including legal, consulting
and financing fees, and fair value gain or loss on foreign exchange
(FX) forward contracts and interest rate hedges), the merger
termination payment received, changes in income tax rates and a
change to an uncertain tax item. KCS has also recognized
significant merger costs and FX gains and losses. These or other
similar, large unforeseen transactions affect diluted EPS but may
be excluded from CP's adjusted diluted EPS. Additionally, the
U.S.-to-Canadian dollar FX rate is unpredictable and can have a
significant impact on CP's reported results but may be excluded
from CP's adjusted diluted EPS. In particular, CP excludes the FX
impact of translating the Company's debt and lease liabilities from
adjusted diluted EPS.
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.
FORWARD LOOKING STATEMENTS AND INFORMATION
This news release includes certain forward looking statements
and forward looking information (collectively, "FLI") to provide CP
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", "will", "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 realization of anticipated
benefits and synergies of the CP-KCS 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 paid
to KCS stockholders; 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;
ability to achieve commitments and aspirations relating to reducing
greenhouse gas emissions and other climate-related objectives;
anticipated in-service dates; success of hedging activities;
operational performance and reliability; customer, 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 (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