CN (CNI) Confirms 'Superior' $325/Share Bid for Kansas City Southern (KSU)
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CN (TSX: CNR ) (NYSE: CNI) today announced that it has submitted a superior proposal for a combination with Kansas City Southern (NYSE: KSU) (“KCS”) in a stock and cash transaction valued at $ 33.7 billion, or $ 325 per share1.
Together, CN and KCS will create the first railway of the 21st century that will seamlessly connect ports and rail networks in the United States, Mexico and Canada, provide superior service, increased competitiveness and access to many new markets to efficiently and safely move goods across North America. This rail and logistics network would reduce traffic congestion and prevent the emission of thousands of tonnes of greenhouse gases into the atmosphere every day. This consolidation will also significantly increase the company's total potential markets and present growth opportunities across the rapidly growing CUSMA network.
_________1 Unless otherwise indicated, all amounts are in US dollars. All conversions between Canadian dollars and US dollars are based on an exchange rate of 0.799 as of April 19, 2021. As applicable, data is based on The closing price of CN and CP shares on the New York Stock Exchange (NYSE) of $ 118.13 and $ 365.37 respectively as of April 19, 2021.2 The combination is expected to be accretive on EPS CN's adjusted diluted ratio, excluding additional transaction-related amortization, in the first full year following CN's takeover of KCS, and is expected to generate a positive double-digit effect when synergies are achieved. fully realized thereafter.
Under the terms of the superior proposal presented today to the KCS Board of Directors, KCS shareholders would receive $ 200 in cash and 1.059 CN common share for each KCS common share, following the closing of the voting trust agreement. Based on the CN stock closing price yesterday, CN's proposal is valued at $ 325 per KCS share. This represents an implied premium of 45% over the unaffected closing price of KCS shares on March 19, 2021, and a 21% increase over the current value of the agreement with Canadian Pacific Railway Limited (TSX : CP, NYSE: CP) ("CP"). With a cash consideration more than twice as high,
CN currently estimates that the combination could result in EBITDA synergies in the region of $ 1 billion annually, with the vast majority of these synergies coming from additional revenue opportunities. CN believes that the transaction will have a highly accretive effect on its adjusted diluted earnings per share in the first full year after the close of the voting trust agreement and the takeover of KCS by CN. These conservative estimates are based on publicly available information and will be refined during the due diligence process.
“CN is ideally positioned to form with KCS a company of greater scope and scale, one that can seamlessly connect more customers to rail hubs and ports in the United States, Mexico and Canada. The CN and KCS networks are highly complementary and have little overlap, which will allow them to accelerate their growth into a single owner and operator end-to-end service in North America. Safer service and increased fuel efficiency on key routes from Mexico to the heart of America will mean a safer, faster, cleaner and stronger railroad. "
- Jean-Jacques Ruest, President and CEO of CN
"We are firmly convinced that our proposal is far superior to the current agreement between KCS and CP because it offers greater financial value in the short and long term, better strategic complementarity, more choice and efficiency gains. for customers and improved benefits for staff and communities. We look forward to constructively engaging with the KCS Board of Directors and all relevant stakeholders in order to complete this superior transaction. "
- Robert Pace, Chairman of the Board of CN
Letter to KCS Board of Directors
Here is a copy of the letter CN sent to the KCS Board of Directors this morning:
Canadian National JJ Ruest President and Chief Executive Officer935 de La Gauchetière Street WestMontreal, Quebec H3B 2M9 Canadian National Jean-Jacques Ruest President and CEO 935, rue de La Gauchetière West Montreal (Quebec) H3B 2M9
Board of Directors Kansas City Southern 427 West 12th Street Kansas City, Missouri 64105
April 20, 2021
To the members of the Board of Directors,
On behalf of the Canadian National Railway Company ("CN"), I am pleased to submit to you this proposal (the "Proposal") on the consolidation of CN with the Kansas City Southern ("KCS").
We have long admired KCS, your customer-centric vision and your commitment to safety, service and performance. We believe that a combination of CN and KCS represents an unparalleled opportunity to create the first railway of the 21st century, which will connect ports in the United States, Mexico and Canada to facilitate trade and economic prosperity. across North America. Together, CN and KCS could provide customers with more choice and greater efficiency, better sustainability performance, more opportunities for staff, stronger investments in communities and significant improvements in the business plan. of security.
Although we have not had the opportunity to conduct a confidential due diligence review of KCS, we have devoted considerable time and resources to analyzing the possibility of a combination of our two businesses. We are satisfied that a transaction between CN and KCS on the terms set out in this letter is significantly superior to the transaction with Canadian Pacific Railway Limited (“CP”) and constitutes a “Superior Business Proposal”. to the merger agreement between KCS and CP.
An irresistible proposition that delivers superior value to KCS shareholders
As part of our Proposal, we are offering KCS shareholders $ 325.00 1 per common share based on current market prices, which assumes a total company value of $ 33.7 billion, including deemed debt. of KCS of approximately $ 3.8 billion. This offer includes:
A premium of 27% on the closing price of KCS shares on April 19, 2021;
A 45% premium on the closing price of KCS shares on March 19, 2021 (the last trading day before the announcement by the KCS of its proposed transaction with the CP);
A 21% premium on the implied value of the proposed transaction with the CP based on the respective closing price of CN and CP shares on April 19, 2021; and
An additional $ 56 per share to KCS shareholders on top of the proposed transaction with CP.
Under our Proposal, KCS shareholders will receive $ 200 in cash and 1.059 CN common share for each KCS common share, with KCS shareholders potentially owning 12% of the company. Holders of KCS preferred shares will continue to receive $ 37.50 in cash for each preferred share.
Clearly our Proposal represents greater value than CP, and also offers greater certainty to your shareholders given the higher initial cash consideration. Most importantly, the equity component of our Proposal gives KCS shareholders the opportunity to participate in the growth of a stronger and more diverse merged company, with a broader reach and a more robust credit profile than the company that would result from the merger of KCS and CP.
We have considerable experience in successfully integrating acquired businesses and a strong track record of working synergies. We are confident that together with your experienced and talented team, we will be able to successfully combine CN and KCS to the advantage of both shareholder groups.3 Based on preliminary analysis of publicly available information , we currently expect the combination to result in EBITDA synergies of approximately $ 1 billion annually, with the vast majority of these synergies coming from additional revenue opportunities. We believe that
The cash portion of the consideration will be funded from cash combined with new debt securities of approximately $ 19.3 billion. Upon closing of the transaction, and assuming KCS debt is approximately $ 3.8 billion, we expect to hold debt securities of approximately $ 33.6 billion, which represents a ratio of leverage of 4.6x pro forma EBITDA 3 for fiscal 2021, and we expect to maintain an investment grade credit rating. Based on the proposed exchange ratio and CN's current quarterly dividend of C $ 0.615 per share, KCS shareholders are expected to receive the equivalent of $ 2.08 per KCS share in annual dividends, or approximately 40% more. higher than the pro forma dividend per share under the CP proposal.
_________1 All figures are in US dollars, unless otherwise noted. All conversions between Canadian dollars and US dollars are based on an exchange rate of 0.799 as of April 19, 2021. Figures where applicable are based on the closing prices of CN and CP shares on the stock exchange. New York City of $ 118.13 and $ 365.37 respectively, as of April 19, 2021.2 Consolidation is expected to be accretive to CN's adjusted diluted EPS, excluding additional amortization related to the transaction, in the first full year following CN's takeover of KCS, and is expected to generate a positive double-digit effect when synergies are fully realized thereafter.3 Represents the multiple of adjusted debt compared to adjusted EBITDA,
Ideal positions that allow the consolidation of CN and KCS networks for superior growth
The combination of CN and KCS will create significant new revenue opportunities by connecting the industrial corridor of North America, further accelerating CN's blue chip growth profile. We expect the combination to enter markets on both sides of Canada's borders and in the United States, and into the rapidly growing markets of the United States and Mexico, which will represent an increase of approximately $ 8 billion. The consolidation of networks and the deployment of CN's pioneering innovative technologies will translate into unparalleled benefits for shareholders. We intend to add smoother, faster and more cost effective options at certain points in the network such as Laredo, Michigan, Southern Ontario and Detroit, for both new and existing customers. The increased market opportunities and improved network efficiency are expected to generate high, high-quality new revenues for the merged company, primarily through the conversion of truck volumes to rail.
The CN and KCS networks are highly complementary and have little overlap. Customers of both companies will benefit from faster, more direct and more efficient service for north-south trade. CN and KCS will end up with a robust network of end-to-end services on a single line from Mexico to Canada, and will have increased capacity to connect ports in the Atlantic, Pacific and Gulf of Mexico. The amalgamated company will be the premier service-competitive railroad in Michigan and Eastern Canada, resulting in more efficient fuel consumption and customer service.
CN has many opportunities to grow its existing network and expand its reach while advancing its innovations and digital capabilities. This will increase the need for manpower and stimulate business initiatives and professional development opportunities. We also believe that the merger of KCS and CN will create growth opportunities for communities in Canada, Mexico and the United States, and promote job creation and economic stability in these communities.
Unparalleled opportunity to create a safer, cleaner and more fuel-efficient railway
CN and KCS share a culture of commitment to safety, service and environmental protection, and the combination of our two companies will accelerate innovation and efficiencies in these areas.
CN is recognized as the environmental leader among North American rail carriers. CN is the only railway to be included in the Dow Jones Sustainability World Index, an honor we have upheld for 9 consecutive years. CN is one of only three Canadian companies to make CDP's prestigious A List and is named to the Corporate Knights' 2020 ranking of the 100 Most Effective Sustainability Companies in the World.
CN was also the first railway to set science-based emissions targets. We are committed to reducing the intensity of our GHG emissions by 29% by 2030 compared to 2015 levels, thanks to our Excellence in Fuel Management program, innovative technologies, increased use of renewable fuels and improved train driving and operating practices. Our goal will be to extend these initiatives to the entire KCS network, combining our respective knowledge to further reduce our collective carbon footprint.
Our proposal will also generate clear environmental benefits for the states and regions traversed by KCS tracks, resulting in the conversion of large volumes of trucking to rail, which is more energy efficient at lower cost. The planned truck transportation diversion will also reduce traffic congestion in these areas and prevent the emission of thousands of tonnes of greenhouse gases into the atmosphere every day.
CN and KCS will be a company with an unwavering commitment to safety. CN currently has very strict safety measures in place to ensure the success and well-being of its people and communities. These measurements are based on the most cutting-edge technologies, including the densest track detection network in the United States. We have devoted significant resources to the development and deployment of advanced technologies and digitization to improve security, and we intend to use these innovations to benefit KCS staff and customers and the communities it serves.
Our commitment to KCS
We appreciate and admire the deep connection KCS has long had with the people of Kansas City and the American Midwest. We will seek to develop and strengthen these links. In this perspective, we intend to continue to operate KCS in the United States and Mexico under the name Kansas City Southern, and to make Kansas City the head office of the activities of our combined companies in the United States.
We will also be pleased to welcome four KCS Directors to CN's Board of Directors at an appropriate time, providing the former KCS Directors with the opportunity to play a meaningful role on the Board of Directors of the merged company. .
Funding commitment and way open for signing, approving and concluding the agreement
We recognize that the certainty of completing the transaction will be a determining factor in the evaluation of our Proposal by the KCS Board of Directors, and we are confident that our Proposal provides this certainty for all aspects.
Our Board of Directors unanimously approved our Proposal. Together with our legal counsel, we have reviewed the merger agreement with CP and are ready to come to an agreement with you on largely similar terms. We can send you a draft agreement at the start of the discussions.
Our Proposal is not subject to any financial contingency. We have retained the services of JP Morgan and RBC Capital Markets as financial advisors, and we have obtained from them financial commitments of $ 19.3 billion that they are ready to release upon signing an agreement. of final merger. Our legal advisers are ready to send you the documents of these commitments when signing a draft merger agreement.
Full execution of the Proposal requires the same regulatory approvals as for the agreement with CP, and we are confident of our ability to obtain these approvals within a timeline corresponding to that of CP's proposed operation.
We are committed to obtaining regulatory approvals on the same terms as in the CP merger agreement, including using the same voting trust arrangement. Importantly, while we are confident that our shareholders and stakeholders wholeheartedly support this transaction, the execution of our Proposal will not require the approval of CN shareholders, which eliminates a closing condition that is in CN's proposal. CP and thus increases the certainty of concluding the agreement.
We are convinced that the benefits of a combination between CN and KCS outweigh those of any other transaction KCS might consider, including CP's proposal. Therefore, and despite the considerably higher value that this proposal represents, we will not increase the amount of the Trade Breakdown Fee included in any final documentation. We firmly believe that any additional value obtained by KCS as part of this process should benefit your shareholders. We assume that your Board of Directors will agree with this principle.
Go ahead and share this transaction with shareholders
We are ready to move quickly to finalize our Proposal. We have a full team dedicated to evaluating KCS and have conducted a thorough review of the affairs and operations of KCS based on publicly available information. We anticipate that it will take less than two weeks to complete the final documentation and confirmatory due diligence review, which we expect to complete simply by having access to the same materials and information as provided to CP. We are prepared to enter into a confidentiality agreement on terms similar to those established between KCS and CP, including reciprocal confidentiality arrangements to facilitate any due diligence on CN that you may require.
We are convinced that the value and certainty offered by our Proposal make it superior to the proposed combination with the CP, and we are convinced that it is in the interest of your shareholders that you engage with us to achieve a rapid final agreement.
We look forward to working with you to achieve optimal results for our respective shareholders, customers and employees, and we are ready and available to chat with you at your convenience.
/ s / Jean-Jacques Ruest
Chairman and CEO
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