Canadian Pacific Ups for Kansas City Southern Bid to $27.3B
August 10, 2021
Canadian Pacific Railway has submitted a superior proposal to acquire Kansas City Southern ("KCS") in a stock and cash transaction representing an enterprise value of approximately USD$31 billion, offering KCS stockholders an alternative recognizing the premium value of KCS while providing more regulatory certainty.
The proposed transaction, which has the unanimous support of the CP Board of Directors, values KCS at $300 per share, representing a 34% premium, based on the CP closing price on August 9, 2021 and KCS unaffected closing price on March 19, 2021. Following the closing into a voting trust, common shareholders of KCS will receive 2.884 CP common shares and $90 in cash for each share of KCS common stock held. The proposed transaction includes the assumption of $3.8 billion of outstanding KCS debt.
This superior proposal represents improved terms to those agreed to in the CP-KCS merger agreement entered into on March 21, 2021 that are substantially similar to those in the CN merger agreement, but offers significantly higher regulatory certainty than the proposed CN merger and significantly higher value than our previously agreed combination.
 Except where noted, all figures are in U.S. dollars.
 Based on KCS closing share price of $224.16 as of March 19, 2021 and CP closing share price of CAD$91.50 (at 1.2565 FX rate) as of August 9, 2021.
The full text of the Aug. 10, 2021 letter to the KCS Board of Directors outlining the proposal is below:
Dear Members of the Kansas City Southern ("KCS") Board of Directors:
On behalf of Canadian Pacific Railway Limited ("CP"), I am pleased to submit the following revised offer ("Offer") for CP to combine with KCS.
As we have stated previously, we understood and respected the KCS Board of Directors' decision to explore the path to a transaction with Canadian National Railway Company ("CN") in the exercise of its fiduciary duties. Nevertheless, CP has always believed that CN's deal was not executable and an attempt to dismantle the unique, pro-competitive deal that CP and KCS had agreed upon. We remain confident that the Surface Transportation Board (the "STB") will ultimately reject CN's proposal to use a voting trust and prove that the proposed CN merger is not a viable transaction.
At the time of CN's offer in May, we chose to not make a revised offer because we believed that engaging in a bidding war with CN would have been value destructive to CP shareholders, and we continue to stand by that decision as having been the right one. However, we believe that now is the right time for us to re-engage with KCS, as the regulatory uncertainty of the proposed CN merger has placed KCS stockholders in the unfortunate position of having to vote on the proposed CN merger and, as a consequence of approving such proposal, eliminate KCS's ability to consider superior offers, all the while not having any level of certainty with respect to whether the STB will approve CN's use of a voting trust. We are excited to provide KCS stockholders a significantly more attractive alternative to this situation: this opportunity to turn down the CN merger proposal and once again pursue a combination of CP and KCSa 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.
Unlike a combination with CN, a CP-KCS combination will be transformational in a positive manner for the railroad industry and will serve the best interests of our respective customers, shareholders and other stakeholders and the North American economy. This end-to-end combination, with a focus on growth, would also ensure the viability of KCS's full network going forward, without the need to address issues related to overlap as in the proposed CN merger. Bringing together CP and KCS, two railroads that have been keenly focused on providing quality service to customers, will unlock the full potential of our networks and our people, and KCS stockholders will have the benefit of participating in the upside of our combined company's growth.
Today, well over two months following your agreement with CN, KCS stockholders are being asked to vote in favor of a transaction that has yet to receive STB approval for closing into voting trust and offers them only risk and uncertainty. During the course of our recent engagement with your stockholders, the most frequent questions we have faced have been (1) will CP be there when the proposed CN merger fails and (2) what will CP be prepared to offer KCS stockholders. It is understandable that the KCS stockholders, being presented with a transaction that is highly unlikely to close, are eager to understand CP's actionable alternative. In response to the concerns raised by the KCS stockholders, we believe that it is imperative that KCS management, the KCS Board of Directors and the KCS stockholders understand the CP alternative.
The terms of our Offer are set forth below:
Benefits of CP's Offer for KCS Stockholders
CP Proxy Statement for KCS stockholder meeting
CP has filed a proxy statement asking stockholders to vote "AGAINST" the proposed CN-KCS combination at the KCS special meeting of stockholders on Aug. 19, 2021 so that KCS's stockholders avoid being locked into the CN-KCS deal and unable to consider other, better, options.
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.
Review of the CN voting trust by the STB remains pending, and the STB has already determined a CN-KCS combination would be reviewed under the new merger rules, the first time a Class 1 combination has been evaluated under that regulatory system.
CP-KCS: The only viable Class 1 combination
A CP-KCS combination would be a positive step toward 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 as a CN-KCS combination, with none of the detriments or the need to enforce promises through more regulation. A CP-KCS combination:
A CP-KCS combination would enhance competition, create new and stronger competitive single-line options against existing single-line routes while taking trucks off the highway. A CP-KCS combination 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.
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.