- CN (CNR) and Kansas City Southern announced that they have entered into a definitive merger agreement
- KCS shareholders will receive $200 in cash and 1.129 shares of CN common stock for each KCS common share
- KCS’ preferred shareholders will receive $37.50 in cash for each preferred share
- The combination of CN and KCS will facilitate growth by connecting North America’s industrial corridor providing new options for shippers and new revenue for the combined company
- CN currently estimates that the combination would result in EBITDA synergies approaching $1 billion annually
- CN will maintain corporate headquarters in Montreal and establish Kansas City as the combined company’s U.S. headquarters
- CN (CNR) is down 1.29 per cent, trading at C$126.61 at 11:50 am ET
CN (CNR) and Kansas City Southern 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 $325 per common share based on CN’s May 13, 2021 offer, which implies a total enterprise value of $33.6 billion, including the assumption of approximately $3.8 billion of KCS debt.
KCS shareholders will receive $200 in cash and 1.129 shares of CN common stock for each KCS common share. This represents an implied premium of 45% when compared to KCS’ unaffected closing stock price on March 19, 2021.
KCS’ preferred shareholders will receive $37.50 in cash for each preferred share.
JJ Ruest, president and chief executive officer of CN remarked,
“We are thrilled that KCS has agreed to combine with CN to create the premier railway for the 21st century. I would like to thank the numerous stakeholders of both companies who have demonstrated overwhelming support for this compelling combination, and we look forward to delivering the many benefits of this pro-competitive transaction to them. I am confident that together with KCS’ experienced and talented team, we will meaningfully connect the continent – enhancing competition, offering more choice for customers, and driving environmental stewardship and shareholder value.”
Patrick J. Ottensmeyer, president and chief executive officer of KCS added,
“As North America’s most customer-focused transportation provider, we are excited about this combination with CN, which will provide customers access to new single-line transportation services at the best value for their transportation dollar, and increase competition among the Class 1 railroads. Our companies’ cultures are strongly aligned, and we share a commitment to environmental stewardship, safe operations, reliable service and outstanding performance. As a larger continental enterprise with complementary routes and an enhanced platform for revenue growth, capital investment, and job creation, we will be positioned to deliver on the transaction’s powerful synergies which will create new growth opportunities for our customers, employees, labor partners, communities and shareholders.”
Strategic and financial rationale
Creates the premier railway for the 21 st century
The combination of CN and KCS will accelerate CN’s industry-leading growth profile by connecting North America’s industrial corridor to create new options for shippers and new revenue for the combined company.
Brings together highly complementary networks to benefit customers
CN and KCS will create a safer, faster, cleaner and stronger railway that is ideally positioned to support the growth of an emerging consumption-based economy through better service options and customer choice.
Enhances competition
This combination will create an express route that connects the U.S., Mexico and Canada with a seamless single-owner, single-operator service, and preserves access to all existing gateways to enhance route choices and ensure robust price competition.
Delivers significant value to KCS shareholders
CN’s proposal delivers an implied premium of 45% to KCS shareholders, as well as participation in the significant upside of the combined company. Additionally, KCS shareholders will have the ability to receive the merger consideration immediately upon the closing of CN’s voting trust, which is expected to be in the second half of 2021.
This combination will also significantly expand the combined company’s total addressable market. CN and KCS would target $8 billion of TAM opportunities while supporting growth across the rapidly growing USMCA network.
Presents compelling synergies and pro-forma financial metrics
CN currently estimates that the combination would result in EBITDA synergies approaching $1 billion annually, with the vast majority of synergies coming from additional revenue opportunities. CN anticipates the transaction to be accretive to CN’s adjusted diluted earnings per share in the first full year following CN assuming control of KCS.
Accelerates innovation
CN and KCS share cultures that value safety, service and environmental stewardship. CN and KCS will accelerate innovation and investment as CN brings its industry-leading safety technology and fuel efficiency to the KCS network.
Yields demonstrable benefits for the environment
The combination will yield demonstrable benefits for the environment by converting significant volumes of truck traffic onto rails, delivering better fuel efficiency at a lower cost. CN has the ability to remove more than 300 trucks from the road with every additional freight train.
Because trains are 4 to 5 times more fuel-efficient than trucks, the combined company will also have an opportunity to realize a 75% reduction in greenhouse gas emissions, resulting in cleaner air for local communities along CN’s line. While preventing thousands of tons of emissions from entering the atmosphere every day, the expected conversion of truck traffic to rails will also reduce traffic congestion in these regions.
Creates opportunities for local communities.
Upon the closing of the transaction, CN will maintain corporate headquarters in Montreal and establish Kansas City as the combined company’s United States headquarters. The Mexico headquarters will remain in Mexico City and the operations center in Monterrey. CN will make significant infrastructure investments in key communities across the new network, including Illinois, Missouri, Michigan, Louisiana and Texas, meaning more economic opportunity and more jobs.
Financing
The cash portion of the agreement 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 EBITDA 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 CN share, KCS shareholders are expected to receive the equivalent of $2.30 in annual dividends per KCS share.
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.
CN (CNR) is a world-class transportation leader and trade enabler. CN safely transports more than 300 million tons of natural resources, manufactured products, and finished goods throughout North America every year.
Kansas City Southern (KCS) is a transportation holding company that has railroad investments in the U.S., Mexico and Panama. Its primary U.S. holding is The Kansas City Southern Railway Company, serving the central and south-central U.S.
CN (CNR) is down 1.29 per cent, trading at C$126.61 at 11:50 am ET.
