Canadian Pacific Railway Rides to Buy Kansas City Southern to be a North American Rail Giant
Posted on 03/21/2021
Canadian Pacific Railway Limited (CP), also known as CP Rail, is a Canadian Class I railway incorporated in 1881. Canadian Pacific is a transcontinental railway in Canada and the United States with direct links to major ports on the west and east coasts. Kansas City Southern (KCS) is a Delaware-registered pure transportation holding company with railroad investments in the United States, Mexico, and Panama. The KCS rail network includes about 6,700 miles of track in the U.S. and Mexico.
Canadian Pacific Railway inked a deal to buy Kansas City Southern in a deal expected to create the first rail network connecting Canada, U.S., and Mexico. The headquarters of the combined company will remain in Calgary. The deal enterprise value is US$ 29 billion, including the assumption of US$ 3.8 billion of outstanding Kansas City Southern debt. This is the biggest purchase of a U.S. asset by a Canadian company since 2016. The combined entity will be named Canadian Pacific Kansas City.
As the U.S. Biden-Harris regime used its government power to stop the Keystone XL pipeline development, Alberta’s energy industry desired to have more control in the transportation of its energy products. The combined 20,000-mile rail network will give Canadian Pacific Railway direct access to the U.S. Gulf Coast & more, allowing it seamlessly to transport Alberta energy directly to Gulf Coast refineries. The deal seeks to improve the economics of crude by rail. The two largest common equity shareholders in Canadian Pacific Railway are hedge funds. The first is TCI Fund Management Ltd. (The Children’s Investment Management Fund), which holds 11,172,077 shares, or an 8.38% position, according to the latest filing data. The other major shareholder is Bill Ackman’s Pershing Square Capital Management LP, holding 9,840,890 shares, or an 7.38% ownership position in the railroad company. TCI Fund Management Ltd. holds a 2.92% stake in rival Canadian National Railway Co.
Canadian Pacific Railway plans to file the merger application with the U.S. Surface and Transportation Board on March 22, 2021.
Deal Funding
To fund the stock consideration of the merger, Canadian Pacific Railway will issue 44.5 million new shares. The cash portion will be funded through a combination of cash-on-hand and raising approximately US$ 8.6 billion in debt, for which financing has been committed. As part of the merger, Canadian Pacific Railway will assume approximately US$ 3.8 billion of KCS’ outstanding debt. Following the closing into trust, Canadian Pacific Railway expects that its outstanding debt will be approximately US$ 20.2 billion.
In 2020, Kansas City Southern rejected an offer from Blackstone Group Inc. and Global Infrastructure Partners.
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.
According to the press release, in regard to the 2-step process to complete the transaction and merger, “CP’s ultimate acquisition of control of KCS’ U.S. railways is subject to the approval of the U.S. Surface Transportation Board (“STB”).
First, CP will establish a “plain vanilla”, independent voting trust to acquire the shares of KCS. Upon shareholder approval of the transaction, and satisfaction of customary closing conditions, CP will acquire KCS shares and place them into the voting trust. This step is currently expected to be completed in the second half of 2021, at which point KCS shareholders will receive their consideration.
CP’s placement of KCS shares into the voting trust will insulate KCS from control by CP until the STB authorizes control. KCS’ management and Board of Directors will continue to steward the company while it is in trust, pursuing KCS’ independent business plan and growth strategies.
The second step of the process is to obtain control approval from the STB and other applicable regulatory authorities. The STB review is expected to be completed by the middle of 2022. Upon obtaining control approval, the two companies will be integrated, unlocking the benefits of the combination.”
Source: KCS Merger Presentation.
