CP Reaffirms its Commitment to Only True
End-to-End and Pro-Competition Combination
Letter Outlines Heightened Regulatory Risk
with CN Proposal; Only CP-KCS is in Public Interest and
Achievable
CALGARY, AB, May 20, 2021 /CNW/ - Today, Canadian Pacific
Railway Limited (TSX: CP) (NYSE: CP) announced that it sent a
letter to Kansas City Southern's ("KCS") Board of Directors calling
on them to reject Canadian National's ("CN") proposal in light of
intervening events and reaffirming its commitment to the
pro-competitive CP-KCS combination and the achievable, compelling
value under the pre-existing merger agreement.
The full text of the May 20, 2021
letter is below:
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
writing in response to the notice KCS delivered to CP on
May 13, 2021, regarding the KCS
Board's determination that the revised proposal received from
Canadian National ("CN") that day (the "Revised CN Proposal")
constitutes a "Company Superior Proposal" (as such term is defined
in our Agreement and Plan of Merger, dated March 21, 2021 (the "CP-KCS Merger
Agreement").
Since the KCS Board received CN's initial unsolicited proposal
on April 20, 2021, CP has been
supportive and understanding of the KCS Board's need to fulfill its
fiduciary duties to its shareholders and to better understand what
CN was purporting to offer. However, as you know, CP has
always believed that CN's proposal is illusory and simply an
attempt to dismantle the unique, pro-competitive deal that CP and
KCS have agreed upon, a deal which provides compelling short-term
and long-term value for our shareholders—value that is actually
achievable. While we respectfully disagreed with the KCS
Board's decision last week to deem the Revised CN Proposal a
Company Superior Proposal, we could understand how the KCS Board
might come to that decision given its fiduciary duties.
Nevertheless, we have remained confident that the Surface
Transportation Board (the "STB") would ultimately reject CN's
proposal to use a voting trust, given that allowing CN to close
into trust would not be in the public interest.
Not surprisingly, in the four days following the KCS Board's
receipt of the Revised CN Proposal, a number of things have
happened which, we believe, should lead you to conclude that the
Revised CN Proposal is not a "superior proposal" as defined in our
merger agreement. I am referring, of course, to (1) the Department
of Justice's ("DOJ") comment publicly filed with the STB on
May 14 (the "DOJ Comment"), and (2)
the STB's decision on May 17 to apply
the more stringent 2001 merger rules to CN's proposal to acquire
KCS and CN's effort to obtain approval to use a voting trust (the
"May 17 Decision").
The STB's May 17 Decision follows
the DOJ Comment, which stated that "[CN's] proposed acquisition
raises sufficient competition concerns on first blush that
[sic] CN should be prohibited from using a voting
trust." The dangers to competition posed by a CN-KCS
transaction, which are in stark contrast to the end-to-end nature
of a CP-KCS transaction, include "the potential elimination of
direct, 'parallel' competition on routes served by both railroads,
for example between Baton Rouge
and New Orleans." The DOJ
further noted concerns relating to the potential elimination of
"parallel lines that do not presently serve the same
origin-destination pairs", which the STB explained "may be used to
compete to attract 'build outs' from a shipper served by one
railroad to the network of the other, for example on north-south
routes through much of Mississippi."
In addition to citing the DOJ Comment for the statement that
such "threats to competition would be present immediately after the
CN voting trust is consummated," in the May
17 Decision, the STB made a number of key statements
regarding its views on CN's proposed transaction, including:
- That CN's proposed transaction "poses issues that the current
merger rules were designed to address, namely the potential
competitive impacts of a merged entity with some degree of
overlapping routes and presently existing direct
competition—characteristics that would appear to pertain to the CN
and KCS systems."
- That "while CN contends that there is 'no cause for concern' as
to whether a sale out of divestiture would 'harm CN's financial
integrity,' the level of debt being utilized by CN to fund the
proposed merger, as well as the substantial premium CN has offered
for KCS, call this assumption into question."
- That "use of a voting trust is a privilege, not a right."
- That voting trusts "should be available only for those rare
occasions when their use would be beneficial."
- And lastly, that the STB "expects to take a more cautious
approach to a voting trust here."
The May 17 Decision shows that the
STB views CN's proposed voting trust through the same lens as the
DOJ—as a threat to competition in the railroad industry and a
threat to the public interest. The fact that the STB chose to
affirmatively express these views in the May
17 Decision (rather than simply denying CN's motion for
approval of its voting trust agreement on the available procedural
grounds of incompleteness) also sends a clear signal on the STB's
stance should CN move forward with renewing its motion for approval
to use a voting trust.
On the basis of these recent events, which have triggered
significantly increased stakeholder opposition, we believe that the
KCS Board has a clear path to conclude that the level of risk
surrounding a CN-KCS transaction and CN's ability to close into
voting trust are too high in order for the Revised CN Proposal to
continue to constitute a Company Superior Proposal. Recently
one of CN's largest shareholders, TCI, also came out publicly to
say that CN's proposal is unlikely to receive regulatory approval
and to recommend to CN that "it is time to end this ill-advised
misadventure." As we have been saying from the start, CN's
proposal is illusory, and the KCS Board, in fulfilling its duties
to its shareholders to explore the proposal, has helped shine
additional light on this fact. We respectfully believe there
is no longer any basis to terminate the CP-KCS Merger Agreement.
The best way for the KCS Board to fulfill its fiduciary duties in
light of recent developments would be to continue to pursue the
CP-KCS combination, which already has the benefit of STB approval
to use a voting trust.
Respectfully, we feel it would be destructive to our mutual
interests to engage in a bidding war in reaction to CN's illusory
offer, particularly where our existing CP-KCS Merger Agreement
provides KCS's shareholders with a significant premium. We
look forward to closing this chapter on the CN proposal and
continuing to work together towards our common goal to complete the
CP-KCS combination, the only viable Class 1 merger, which will be
transformational and creates meaningful and compelling immediate
short and long-term value serving the best interests of our
respective customers, stakeholders and the North American
economy.
As you know, this is a unique opportunity to bring together the
two best performing Class 1 railroads for the past three years on a
revenue growth basis. Our similar cultures, shared focus on safety
and collective commitment to providing significant positive impacts
for our respective employees, customers, communities, and
shareholders has not changed. This end-to-end combination, with a
focus on growth, also ensures the viability of KCS's full network
going forward, without the need to address issues related to
overlap. Bringing together our two railroads, that have been keenly
focused on providing quality service to customers, will unlock the
full potential of our networks and our people.
On a personal note, I have never been more excited about this
combination. I am ready to work tirelessly for our shared interests
in the years ahead – and I believe I have a lot of years left. CP's
proven track record of performance and its record as the safest
Class 1 railroad for 15 consecutive years will serve KCS well. We
will, in turn, benefit from your leadership and expertise as we
grow sustainably, together.
In closing, we are excited about this once-in-a lifetime
partnership and remain committed to everything this opportunity
presents. These two companies have long, proud histories and an
even brighter future, together.
Respectfully yours,
Keith Creel
President and Chief Executive Officer
Canadian Pacific
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: 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 pending share split
of CP's issued and outstanding common shares; 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 webpage 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
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.sec.gov and www.investors.kcsouthern.com. 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