Keith Creel to Pat Ottensmeyer and the KCS Board: Stick With Us

Keith Creel

Canadian Pacific President and CEO Keith Creel on May 20 responded to the Kansas City Southern Board of Directors and President and CEO Pat Ottensmeyer calling on them to reject CN’s counter-proposal “in light of intervening events” and stay with “the achievable, compelling value under the pre-existing merger agreement” with CP. Creel also confirmed that CP will not engage in a bidding war with CN.

The full text of the May 20, 2021 letter:

On behalf of Canadian Pacific Railway Limited, I am writing in response to the notice KCS delivered to CP on May 13, 2021, regarding the KCS Board’s determination that the revised proposal received from CN  that day (the “Revised CN Proposal”) constitutes a “Company Superior Proposal” (as such term is defined in our Agreement and Plan of Merger, dated March 21, 2021 (the “CP-KCS Merger Agreement”).

Since the KCS Board received CN’s initial unsolicited proposal on April 20, 2021, CP has been supportive and understanding of the KCS Board’s need to fulfill its fiduciary duties to its shareholders and to better understand what CN was purporting to offer. However, as you know, CP has always believed that CN’s proposal is illusory and simply an attempt to dismantle the unique, pro-competitive deal that CP and KCS have agreed upon, a deal which provides compelling short-term and long-term value for our shareholders—value that is actually achievable. While we respectfully disagreed with the KCS Board’s decision last week to deem the Revised CN Proposal a Company Superior Proposal, we could understand how the KCS Board might come to that decision given its fiduciary duties. Nevertheless, we have remained confident that the Surface Transportation Board would ultimately reject CN’s proposal to use a voting trust, given that allowing CN to close into trust would not be in the public interest.

Not surprisingly, in the four days following the KCS Board’s receipt of the Revised CN Proposal, a number of things have happened that, we believe, should lead you to conclude that the Revised CN Proposal is not a “superior proposal” as defined in our merger agreement. I am referring, of course, to (1) the Department of Justice’s comment publicly filed with the STB on May 14 (the “DOJ Comment”), and (2) the STB’s decision on May 17 to apply the more stringent 2001 merger rules to CN’s proposal to acquire KCS and CN’s effort to obtain approval to use a voting trust (the “May 17 Decision”).

The STB’s May 17 Decision follows the DOJ Comment, which stated that “[CN’s] proposed acquisition raises sufficient competition concerns on first blush that [sic] CN should be prohibited from using a voting trust.” The dangers to competition posed by a CN-KCS transaction, which are in stark contrast to the end-to-end nature of a CP-KCS transaction, include “the potential elimination of direct, ‘parallel’ competition on routes served by both railroads, for example between Baton Rouge and New Orleans.” The DOJ further noted concerns relating to the potential elimination of “parallel lines that do not presently serve the same origin-destination pairs,” which the STB explained “may be used to compete to attract ‘build outs’ from a shipper served by one railroad to the network of the other, for example on north-south routes through much of Mississippi.” 

In addition to citing the DOJ Comment for the statement that such “threats to competition would be present immediately after the CN voting trust is consummated,” in the May 17 Decision, the STB made a number of key statements regarding its views on CN’s proposed transaction, including:

• That CN’s proposed transaction “poses issues that the current merger rules were designed to address, namely the potential competitive impacts of a merged entity with some degree of overlapping routes and presently existing direct competition—characteristics that would appear to pertain to the CN and KCS systems.”
• That “while CN contends that there is ‘no cause for concern’ as to whether a sale out of divestiture would ‘harm CN’s financial integrity,’ the level of debt being utilized by CN to fund the proposed merger, as well as the substantial premium CN has offered for KCS, call this assumption into question.”
• That “use of a voting trust is a privilege, not a right.”
• That voting trusts “should be available only for those rare occasions when their use would be beneficial.”
• And lastly, that the STB “expects to take a more cautious approach to a voting trust here.”

The May 17 Decision shows that the STB views CN’s proposed voting trust through the same lens as the DOJ—as a threat to competition in the railroad industry and a threat to the public interest. The fact that the STB chose to affirmatively express these views in the May 17 Decision (rather than simply denying CN’s motion for approval of its voting trust agreement on the available procedural grounds of incompleteness) also sends a clear signal on the STB’s stance should CN move forward with renewing its motion for approval to use a voting trust.

On the basis of these recent events, which have triggered significantly increased stakeholder opposition, we believe that the KCS Board has a clear path to conclude that the level of risk surrounding a CN-KCS transaction and CN’s ability to close into voting trust are too high in order for the Revised CN Proposal to continue to constitute a Company Superior Proposal. 

Recently one of CN’s largest shareholders, TCI, also came out publicly to say that CN’s proposal is unlikely to receive regulatory approval and to recommend to CN that “it is time to end this ill-advised misadventure.” As we have been saying from the start, CN’s proposal is illusory, and the KCS Board, in fulfilling its duties to its shareholders to explore the proposal, has helped shine additional light on this fact. We respectfully believe there is no longer any basis to terminate the CP-KCS Merger Agreement. The best way for the KCS Board to fulfill its fiduciary duties in light of recent developments would be to continue to pursue the CP-KCS combination, which already has the benefit of STB approval to use a voting trust.

Respectfully, we feel it would be destructive to our mutual interests to engage in a bidding war in reaction to CN’s illusory offer, particularly where our existing CP-KCS Merger Agreement provides KCS’s shareholders with a significant premium. We look forward to closing this chapter on the CN proposal and continuing to work together toward our common goal to complete the CP-KCS combination, the only viable Class I merger, which will be transformational and creates meaningful and compelling immediate short and long-term value serving the best interests of our respective customers, stakeholders and the North American economy. 

As you know, this is a unique opportunity to bring together the two best-performing Class I railroads for the past three years on a revenue growth basis. Our similar cultures, shared focus on safety and collective commitment to providing significant positive impacts for our respective employees, customers, communities, and shareholders has not changed. This end-to-end combination, with a focus on growth, also ensures the viability of KCS’s full network going forward, without the need to address issues related to overlap. Bringing together our two railroads, that have been keenly focused on providing quality service to customers, will unlock the full potential of our networks and our people. 

On a personal note, I have never been more excited about this combination. I am ready to work tirelessly for our shared interests in the years ahead—and I believe I have a lot of years left. CP’s proven track record of performance and its record as the safest Class I railroad for 15 consecutive years will serve KCS well. We will, in turn, benefit from your leadership and expertise as we grow sustainably, together. 

In closing, we are excited about this once-in-a lifetime partnership and remain committed to everything this opportunity presents. These two companies have long, proud histories and an even brighter future, together.