CP

Business Context and Reporting Period

Company: Canadian Pacific Railway Limited (CP)
Filing Date: September 15, 2021
Event: Entry into a definitive Agreement and Plan of Merger with Kansas City Southern (KCS).
Context: CP entered into the Merger Agreement immediately after KCS terminated a prior merger agreement with Canadian National Railway (CN). The transaction involves a two-step merger structure where KCS will become a wholly-owned subsidiary of CP, followed by a voting trust pending Surface Transportation Board (STB) approval.

Key Financial Metrics and Transaction Terms

Merger Consideration:

• Common Stock: 2.884 CP common shares plus $90 cash per KCS share.
• Preferred Stock: $37.50 cash per KCS preferred share.

• Bridge Facility: $8.5 billion senior unsecured bridge term loan facility committed by BMO and Goldman Sachs to fund the merger consideration.
• Term Loan: $500 million unsecured term loan secured to finance fees related to the termination of the prior CN agreement.
• Backstop Facilities: Up to $1.3 billion for CP and up to $600 million for KCS to backstop existing credit agreements if lender consents are not obtained.

• CP must maintain a Funded Net Debt to EBITDA ratio of not more than 4.00:1.00 prior to the closing of the Mergers.

• Standard Fee: $700 million payable by either party if they terminate due to a change in recommendation or a superior proposal.
• Regulatory Fee: $1 billion payable by CP to KCS if the deal fails due to an injunction related to railroad regulation or the Defense Production Act.
• Refunds: CP agreed to remit $700 million to KCS to cover KCS's termination fee payment to CN, and another $700 million as a refund of a fee previously received from KCS.

Material Changes and Conditions

Material Changes:

• Termination of the prior merger agreement between KCS and CN.
• Execution of a new merger agreement between CP and KCS.
• Securing of significant new debt financing commitments ($8.5 billion bridge + $500 million term loan).

• Approval by KCS and CP shareholders.
• SEC effectiveness of Form F-4 registration statement.
• Regulatory approvals from the Mexican Antitrust Commission and Mexican Federal Telecommunications Institute.
• Listing approval on NYSE and Toronto Stock Exchange.
• Absence of injunctions or material adverse effects.

• End Date: February 21, 2022 (extendable to May 21, 2022 if only Mexican regulatory approvals remain).

Outlook, Risks, and Management Commentary

Management Commentary:

The transaction is expected to create a single, integrated rail network connecting Canada, the U.S., and Mexico. Post-closing, four KCS board members will be appointed to the CP board. The company expects to replace the bridge facility with permanent financing prior to closing.

• Regulatory Risk: Failure to obtain STB or Mexican regulatory approvals could trigger termination fees or deal failure.
• Financing Risk: Reliance on bridge financing and the ability to access capital markets for permanent financing.
• Operational Risk: Integration challenges, labor disputes, and disruptions from the COVID-19 pandemic.
• Market Risk: Fluctuations in commodity prices, fuel costs, and currency exchange rates.

The filing contains forward-looking information regarding synergies, integration plans, and future performance, which are subject to significant risks and uncertainties.

Investor Verification Checklist

• Shareholder Approval: Verify the outcome of the shareholder votes for both CP and KCS.
• Regulatory Status: Monitor the progress of approvals from the Surface Transportation Board (STB) and Mexican regulators.
• Financing Execution: Confirm the conversion of the $8.5 billion bridge facility into permanent financing.
• Termination Fee Exposure: Track any potential triggers for the $700 million or $1 billion termination fees.
• Debt Covenant Compliance: Review CP's Funded Net Debt to EBITDA ratio to ensure it remains below 4.00:1.00 prior to closing.