North America - Canadian Pacific Railway Limited (CP) today announced the completion of its acquisition of Kansas City Southern (KCS).
 
The transaction represents an enterprise value of approximately US$31 billion.
 
KCS stockholders will receive 2.884 CP common shares and US$90 in cash for each share of KCS common stock held and US$37.50 in cash for each share of KCS preferred stock held.
 
Immediately upon the closing of the acquisition, the shares of KCS were placed into a voting trust with Dave Starling, former KCS President and CEO, appointed as the Voting Trustee.
 
The Voting Trust, which ensures KCS will operate independently of CP, will remain in effect until the U.S. Surface Transportation Board (STB) issues its decision on the companies' joint railroad control application.
 
The STB's approval of CP's control of KCS would create Canadian Pacific Kansas City Limited (CPKC), the only single-line railroad linking the United States, Mexico, and Canada.
 
The STB review of CP's proposed control of KCS is expected to be completed in the fourth quarter of 2022.
 
"Today is a historic day for our two iconic companies. CPKC will become the backbone connecting our customers to new markets, enhancing competition in the U.S. rail network, and driving economic growth across North America while delivering significant environmental benefits. We are excited to reach this milestone on the path toward creating this unique truly North American railroad," said Keith Creel, CP President and Chief Executive Officer.
 
"As a Board and management team, we are proud of the countless contributions and achievements of all those who work for Kansas City Southern. We are excited for the possibilities that will open to us through this combination with CP and we look forward to our next chapter," said Patrick J. Ottensmeyer, KCS President and Chief Executive Officer.
 
Expected benefits from the business combination will not be realized until the STB approves CP's control of KCS' railroads.
 
Upon obtaining control approval from the STB, the two companies expect to achieve full integration over the ensuing three years, unlocking the benefits of the combination.
 
For information on the benefits of a CP/KCS combination, visit futureForFreight.com.
 
Financial Implications of Closing into Trust
 
To fund the cash consideration of the merger, CP's wholly-owned subsidiary, Canadian Pacific Railway Company sold new debt of $2.2 billion and US$6.7 billion, both of which are guaranteed by CP.
 
The debt transactions closed on 24 Nov 2021 and 2 Dec 2021, respectively.
 
CP expects to incur approximately $21 million in interest expense in the quarter from the two issuances.
 
Today, CP issued 262,597,106 new common shares as the share consideration under the terms of the merger agreement resulting in approximately 721.4 million weighted average diluted shares outstanding in the quarter.
 
During the period that KCS is held in voting trust, CP will account for its ownership under the equity method of accounting.
 
From 14 Dec 2021 onward, CP will report KCS' earnings, adjusted for the amortization of the fair value write-up, on a single line of CP's consolidated statements of income.
 
Updated Outlook
 
Following the impacts of the accelerated timeline of the transaction closing into trust, and the impacts of the extreme weather in British Columbia, CP now expects full-year growth in adjusted diluted EPS1,2 in 2021 to be in the high single digits.
 
CP expects full-year volumes to be approximately flat in 2021, as measured in revenue ton-miles, compared to 2020.
 
CP's revised guidance assumes an updated effective tax rate of approximately 24.0 percent.
 
CP now expects other components of net periodic benefit recovery to increase by approximately $45 million versus 2020 and continues to expect capital expenditures of $1.55 billion.
 
1 CP's expectation for high single-digit growth in 2021 adjusted diluted EPS is relative to 2020's adjusted diluted EPS of $3.53. CP's reported diluted EPS was $3.59 in 2020.
 
2 Although CP has provided a forward-looking non-GAAP measure (adjusted diluted EPS), management is unable to reconcile, without unreasonable efforts, the forward-looking adjusted diluted EPS to the most comparable GAAP measure (diluted EPS), due to unknown variables and uncertainty related to future results. These unknown variables may include unpredictable transactions of significant value. In recent years, CP has recognized acquisition-related costs (including legal, consulting, and financing fees, and fair value gain or loss on foreign exchange (FX), forward contracts, and interest rate hedges), the merger termination payment received, changes in income tax rates, and a change to an uncertain tax item. KCS has also recognized significant merger costs and FX gains and losses. These or other similar, large, unforeseen transactions affect diluted EPS but may be excluded from CP's adjusted diluted EPS. Additionally, the U.S.-to-Canadian dollar FX rate is unpredictable and can have a significant impact on CP's reported results but may be excluded from CP's adjusted diluted EPS. In particular, CP excludes the FX impact of translating the Company's debt and lease liabilities from adjusted diluted EPS.
 
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, Garcia-Cuellar, Aiza y Enriquez, 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.
 
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