Montreal Quebec - CN and KCS today announced that they have entered into a definitive merger agreement to create the premier railway for the 21st century.
 
Under the terms of the agreement, which was unanimously approved by the Board of Directors of each company, KCS shareholders will receive US$325 per common share based on CN's 13 May 2021 offer, which implies a total enterprise value of US$33.6 billion, including the assumption of approximately US$3.8 billion of KCS debt.
 
KCS shareholders will receive US$200 in cash and 1.129 shares of CN common stock for each KCS common share, with KCS shareholders expected to own 12.6 percent of the combined company.
 
This represents an implied premium of 45 percent when compared to KCS' unaffected closing stock price on 19 Mar 2021.
 
KCS' preferred shareholders will receive US$37.50 in cash for each preferred share.
 
Financing
 
The cash portion of the consideration will be funded through a combination of cash-on-hand and approximately $19 billion of new debt.
 
Upon closing of the transaction, and including the assumption of approximately $3.8 billion of KCS debt, we expect to have outstanding debt of approximately $33 billion, representing a leverage ratio of 4.5x pro forma 2021 EBITDA3, and we expect to maintain an investment grade credit rating.
 
Based on the proposed exchange ratio and CN's current quarterly dividend of $0.615 per CN share, KCS shareholders are expected to receive the equivalent of $2.30 in annual dividends per KCS share.
 
Approvals and Timing
 
CN and KCS are confident in their ability to obtain all necessary regulatory approvals, including from the Surface Transportation Board (STB) and the Federal Economic Competition Commission (COFECE), and Federal Telecommunications Institute (IFT) in Mexico.
 
CN has proposed a "plain vanilla" voting trust.
 
Upon KCS shareholder approval of the transaction, and satisfaction of customary closing conditions, CN will acquire KCS shares and place them into the voting trust.
 
KCS shareholders will receive the merger consideration immediately upon the closing of CN's voting trust, which is expected to be in the second half of 2021.
 
Following this step, the STB and other regulatory authorities must approve CN's control of KCS.
 
The completion of the transaction is expected to take place in the second half of 2022.
 
Upon completion, CN and KCS will begin the integration process to realize the significant benefits of the combination for their stakeholders.
 
Author unknown.