Good morning, and welcome to the CN Conference Call. Please note that this event is being recorded. I would now like to turn the conference call over to Paul Butcher, Vice President of Investor Relations. Please go ahead.
So good morning, and thank you for joining us today on the conference call regarding CN's proposal to combine with Kansas City Southern. With me today are JJ Ruet, our President and Chief Executive Officer Ghislain Houle, Executive Vice President and Chief Financial Officer Rob Reilly, Executive Vice President and Chief Operating Officer and Sean Finn, Executive Vice President, Corporate Services and Chief Legal Officer. Earlier this morning, CN issued a press release announcing our compelling superior proposal to combine with KCS. You may obtain a copy of this press release and the presentation that we will refer to on today's call on our website at www.cn.ca or www.connectedcontinents.com. This call is being webcast live and replay will be available on the Investor Relations section of our website.
Before we begin, I would like to draw your attention to the forward looking statements and additional legal information, which are available at the beginning of the presentation. As a reminder, today's conference call contains certain projections and other forward looking statements within the meaning of The U. S. And Canadian securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements and are more fully described in our cautionary statement regarding forward looking statements in our presentation.
At the end of the prepared remarks, we will conduct a Q and A session and we ask that you limit yourself to one question. I will now turn over the call over to JJ, our Chief Executive Officer. Well, thank you, Paul, and thank you all of you for joining us this morning. I am here with my team who you are familiar with most of you are familiar with. We are a team with significant rail industry experience that is focused on excellence in
operation, safety, the environment, technology, M and A and regulatory matter. Rob and I will walk you through the presentation and Gisela and Sean will engage during the Q and A. On Page five, as you all know by now, this morning we announced a superior proposal to combine with the KCS. The team is very excited about this announcement and what it means for the future of both companies, our stakeholders and the bright future of the industry. KCS is the ideal partner for us and at the right time.
CN's proposal represents a 21% premium to CP's offer and more than double the amount of cash per share resulting in not just a greater value, but also greater certainty of value for KCS shareholders. KCS shareholders will receive $200 in cash and 1.059 shares of CN common stock for each KCS common share. KCS preferred shareholders will continue to receive $37.5 in cash for each preferred shares. KCS shareholders are expected to own 12% of the combined company. The stock consideration will also allow KCS shareholders to participate in CN's dividend as well as the upside of a stronger, more diverse company with greater scale than the company that would otherwise be produced by the combination of PCS and CP.
Our superior access to the capital market, stronger balance sheet, lower cost of financing and ability to realize superior and higher quality synergies allow us to make a more attractive offer to KCS shareholders while expecting to generate attractive accretion to our CN shareholders. These higher quality synergies and new revenue opportunities are driven by the significant environmental benefits tied to the conversion of long haul truck to the more cost effective rail and commodal supply chain. We also believe our proposal present a lower execution risk than a competing offer. We have finalized a $19,300,000,000 of financing commitment from JPMorgan and RBC to support our proposal. Additionally, our proposal is not subject to CN shareholders approval removing a condition as compared to the CP transaction.
We see significant value in KCS, in its team, in its experience and its network and we intend to build and strengthen the joint business through this transaction. To that end, we intend to continue operating the KCS business in United States and Mexico under the KCS name and brand and we would establish Kansas City as a headquarter of the combined company U. S. Operation. Overall, we are the better bid, the better partner, the better railway and the best solution for KCS and for the North American economy.
On Page six, the combination of CN and KCS would create a premium railway for the twenty first century connecting ports of The United States, Mexico and Canada to facilitate trade and to power economic prosperity across North America. Our combination with KCS would create a company with broader reach, greater scale and with the ability to connect more customers to more rail destination and port with robust single owner, single operator service. By competing head to head at lower costs with safer service and better fuel efficiency from Mexico to the heartland of America, the result will be a safer, faster, cleaner and stronger railway than any other proposed combination for PCS. In addition, CN has recently undertaken major new ESG initiative that will reinforce our status as a leader and we will bring those to the KCS business as well. Lastly, based on our conservative and preliminary analysis of publicly available information, The combined company is expected to achieve EBITDA synergies approaching $1,000,000,000 with the vast majority coming from additional revenue opportunities.
We anticipate the transaction would be accretive to CN non GAAP diluted earnings per share in the first full year following termination of the Boarding Trust and CN assuming control of KCS and double digit accreditation up in full realization thereafter. The strong cash flow generation of the combined company would allow the company to rapidly deliver following the close of the transaction. We are confident in our ability to achieve all necessary regulatory approval to close into our voting trust and then ultimately receive approval to combine with KCS. We'll go on Slide seven. As I've mentioned before, with safer service, better fuel efficiency on Key Route from Mexico to the heartland of America, the results would be a safer, faster, cleaner and stronger railway.
CN brings its extensive operating expertise as a pioneer precision schedule railroading with our premier three coast access. CCS will also benefit from our fuel efficiency and emission reduction leadership as well as our culture of safety, efficiency, integrity and diversity which has been recognized by the Dow Jones Sustainable World Index for the last nine years. In addition, CN has a disciplined capital allocation focus and a long standing track record of strategic and acquisitive acquisition throughout North America, which has resulted in successful integration of rail network. We are confident that together with KCS experienced and very talented team, we would be able to continue that success in a combination of CN and KCS to the benefit of both sets of shareholders. On Page eight, CN has an unmatched North American rail network built through the acquisition of multiple over multiple decades.
We have a twenty five years proven track record of successful acquisition and integration of many railroads and transportation partners, including the AG and E, the Illinois Central and the Wisconsin Central. The combination of CN and KCS would enhance competition and create significant new growth opportunity by connecting North America Industrial Corridor, which will further accelerate CN industry leading intermodal container growth. We are confident in our ability to again achieve a seamless service integration to deliver the benefit of a combination to the stakeholders. Unlike other railway, CN has a meaningful Chicago advantage when moving goes to any direction that is the AZNE. It travels around Chicago, not to the heart of the city, removing the risk of seasonal sometimes quite crippling rail bottleneck.
To put that in real terms, the EEG and E saves CN on average between twenty four to forty hours transitioning to Chicago. I will now turn it over to Rob to cover some of the combined CN and KCS network meaningful benefits. Rob? All right. Thank you, JJ.
Good morning. As you can see on Slide nine, the combined CN and KCS network will create meaningful benefits. It will provide shorter distances than would be offered by the previously proposed combination on many key routes, including Laredo and Dallas to Chicago, Detroit, Toronto and Montreal. It will extend our reach by adding a line between Detroit and Kansas City, creating a faster, safer and more economical rail option for shippers who currently rely on trucks. Greater access to more ports means new markets and greater choice exporters needing to connect to different geographies.
Our access to Prince Rupert, North America's closest port to Asia, is just one of its advantages. A container from Asia loaded onto one of our trains in Prince Rupert will travel on a seamless journey to any point in Canada or the American art land. And after the combination with KCS, Kansas City, St. Louis, and Memphis will become accessible from the ports of New Orleans, Mobile, Lazaro Cardenas, and the Port Of Montreal. It will yield revolutionary flexible trade access via any of the three coasts.
Together, CN and KCS will create the end to end USMCA network, facilitating trade and powering economic prosperity across North America. On Slide 10, this proposed combination is a story of growth and more specifically, truck to rail conversion. To drive these revenue synergies, it will require a railroad that has a proven track record of intermodal growth. Over the past decade, no other railroad has grown intermodal at a faster rate than CN, with our intermodal volumes growing by nearly 80%. This combination will create one of the largest intermodal networks in North America, further enabling the supply chain.
CN's proposal will drive more growth for communities across Canada, Mexico and The U. S, thereby generating job creation for these communities. In addition, increased intermodal truck conversions and faster direct connections between the three countries will create jobs for a diverse range of unionized workers. On Slide 11, a CNKCS combination will create a highly diversified premier North American railway with combined annual revenues in excess of $13,000,000,000 KCS existing business mix complements CN's, while building on our leadership in intermodal, grain and fertilizers, forest products and automotive. From a geographic perspective, KCS will grow CN's presence and capabilities in The U.
S. Market, most notably offer a meaningful opportunity to expand its rail network into Mexico. On Slide 12, we are confident that a CNKCS combination will create significant value for the combined company shareholders. We expect the combined company to deliver nearly $1,000,000,000 in annual high quality EBITDA synergies to be realized within three years of integration. As previously mentioned, this combination will be driven by growth with approximately 75% of revenue synergies anticipated to come from the ESG positive conversion from truck to rails.
Again, this combination is about growth, enhancing shippers' choices and realizing new opportunities. It will lead to better service for customers and create a smaller carbon footprint through truck conversion, which will result in the creation of more rail jobs. On Slide 13, both CN and KCS have an unwavering focus on ESG and fuel efficiency, and we will combine our industry leading practices with KCS strengths. We have recently undertaken major new ESG initiatives focused on environmental protection, active social responsibility, stakeholder engagement and best in class governance. The diligent execution of these initiatives has helped us to solidify our status as an ESG leader in the industry.
Additionally, in general, rail is four to five times more fuel efficient than trucks and CN consumes roughly 15% less fuel per gross ton mile than the average of our Class one railway peers. You multiply those advantages across our combined network over time and you will find that a CNKCS railroad has a far superior environmental profile. This transaction will yield significant benefits for North American economy and environment by converting volumes of truck traffic on the rails, which deliver safer, cleaner service at a lower cost, while also reducing highway traffic congestion and avoiding thousands of tons of greenhouse gas emissions from entering the atmosphere every day. On Slide 14, CN and KCS will also benefit from advanced operational technology, which we leverage to drive our commitment to safety. CN currently has stringent safety measures in place to ensure the success and well-being of its employees and communities in which we operate.
These safety measures are supported by advanced technologies such as automated track inspection cars, safety inspection portals and handheld technology for train crews that digitize manual processes to drive standardization, improve productivity, reduce costs and improve the customer experience with CN. Also last year, we appointed Dominic Malefant as Executive Vice President and Chief Information and Technology Officer. Dom has already provided to be a tremendous asset as he is leading the development and deployment of advanced technologies and digitization to improve inspection reliability, provide rich data analytics, generate automation that unlocks capacity and further improve safety. On Slide 15, we are deeply committed to maintaining our strong balance sheet and investment grade rating. We have historically maintained one of the strongest credit ratings in the sector.
As a result of this combination, we will temporarily increase our leverage to approximately 4.6 times and expect to rapidly delever to approximately 3.5 times in two years. We also expect to pause share purchase activity. There will also be no changes to our current dividend policy. Based on the proposed share consideration in our current quarterly dividend, we expect KCS shareholders to receive the equivalent of $2.08 in annual dividends per KCS share, an amount that is approximately 40% higher than the pro form a dividend per share under the current proposal. Overall, this provides a compelling cash flow opportunity.
And on Slide 16, the combination of CN and KCS will be transformative to the benefit of both company shareholders, customers and communities in our shared long term success. KCS is the ideal partner for us at the right time, offering highly complementary and strategic benefits to the combined company that will result in meaningful network expansion, synergies, ESG driven growth opportunities and the premier Canada U. S.-Mexico railway network for the twenty first century. We are confident that the benefits of CN KCS combination will be unmatched by any other potential transaction that KCS may consider. CN's Board of Directors has unanimously approved this proposal and our incoming directors are supportive of this proposal and aligned with CN's strategic vision and imperatives.
With that, I'll turn
it back over to JJ. Thank you, Rob. And to conclude, our proposal to combine with KCS would result in a faster, safer, more fuel efficient and stronger railway and we're confident CN is the best to work for this important North American asset. We are the better bid, the better partner, the better railway and the best solution for KCS and the North American economy. Dollars 200 cash and $5.09 shares for each KCS share.
I'm confident in our ability to achieve a seamless integration and to deliver the benefit of the combination to the combined company stakeholders. I look forward to engaging constructively with the KCS Board and all relevant stakeholders to deliver against this superior transaction. So operator, we'll turn it back to you for the call and the four of us here will engage in the Q and A. Amy?
Thank you. At this time, we will be conducting our question and answer session. Your first question comes from the line of Chris Wetherbee with Citi. Chris, your line is open.
Hey, good morning, Chris.
Good morning, guys. Good morning. So maybe I could ask a question to start on sort of the bigger picture thought here. So you and I have talked in the past about potential M and A, and you've always felt that, that was likely down the road. In the past, you've talked a little bit about Eastern rails.
What sort of makes KSU jump the line in terms of your preference to be the right rail for you now, particularly considering that there's another offer out there?
So thank you, Chris, the question. So definitely, at this point, the Board of KCS has decided to crystallize the value for KCS shareholders and the company is now available for change in transactions. So we want to partner. It's not very often that Class one railroad or large property become available. And we've always had vision of combining the crude company and what it could do for North America and especially at this time.
At this time, we're about to see the economic recovery post COVID. The USMCA or some of you refer to NAFTA has been renewed and that has definitely a tailwind rising tide for the North American economy North South. There's also the near shoring Mexico that's looking better. The labor costs in the Chinese coastal province has gone up to the point where manufacturing in Mexico makes more and more sense. And then by the time you add all these things, what's really missing in North America at this point is really a true North South Continental Railroad, the premier railroad for this decade, the twenty first century, a railroad that can really rival with truck.
And as Rob mentioned, a lot of the freight today that moves in the North South is only getting a partial ride by rail or it's actually moving all truck. And these are huge distance and it's very in the scale where CN is very strong intermodal, where CN is very strong fuel efficiency and putting together a network for the next decade and the 20 century that would connect the USMCA NAFTA countries has a lot of value. And that's why you see the value to the acquisition that we can create. And also that's why we justify the offer we're making this morning to KCS. So there's a bright future out there for a continental railroad that connects North South and it's in that mind that we're approaching it.
But the why now, the Board of KCS has decided that they want to crystallize the value for their shareholders. Therefore, the opportunity is now. Thank you. Thank you.
Your next question comes from the line of Fadi Chamoun with BMO. Fadi, your line is open.
Good morning, Fadi.
I guess you answered a little bit about why now, but I'm thinking as you're going through the presentation that it seems like, end of this trade off here in growth and return, I mean, you're emphasizing how the biggest opportunity of the combination is intermodal, which is really one of the most competitive end market and especially if we can move it down the road with truck automation, down the road, which could make that market a little bit more competitive. So I'm just kind of trying to think about how do you think about the return in terms of operating ratio return on invested capital of this combination down the road? Can we kind of see an enhancement in the return that we see currently in CN and the EOR, see currently in CN despite that what it looks like, a very intermodal driven top line opportunity?
So thank you, Fadi. Let me address the question and then I'll turn it to Rob for further color. So you look at the North American economy, more and more the North American economy depend on the service sector. People who actually have good job, good paying job, good disposable income and who consume. Therefore the continent 70% of GDP and growing every year is dependent on people who consume.
That's the world of intermodal, that's the world of truck. And I think by and large, the USMCA is also the world of intermodal, the world of truck because that's what's moving back and forth between these three countries. So the future for the rail industry is that very challenge. How do we participate in this bigger, much bigger pie of future freight that's ahead of us and be less reliant on the freight that's behind us, world, you know, the freight of thermal coal or even up to a point the freight of crude. So when you look at the network, Mexico City to Toronto, you're talking 2,800 mile or you're looking at for consumable products.
If you're looking on auto parts like St. Louis, Patuzzi to Detroit, you're talking 2,300 mile, rail mile. So these are really the sweet spot of where intermodal should and need to dominate, where the fuel efficiency of four zero one is really key and where the fact on these very long haul routes, it's a question of time before it's becoming more and more difficult to find drivers who wanna have this kind of lifestyle. The issue though, a single line network needs to be put together so that when leave Mexico and go to Detroit or you go to Wisconsin or Toronto, you actually have a service that can compete with the current cost of the long haul truck or this combination in Chicago. So putting a natural network North South as we have East West is really what will unshackle the opportunity at hand.
And this is a growth story, About 80% of the synergies opportunity that we're looking at are revenue driven and most of that revenue is related to taking truck up the road, either long haul truck or truck that comes from the Chicago Interchange. Rob, do you want
to add to that? Yes. I think you answered it quite well. But in short, we see this as a win for all shippers and those that depend on the USMCA. It really gives them more options, not just the intermodal customers, but grain customers, petrochemical, auto, auto parts, all of that I think wins throughout this.
But in terms of the intermodal conversion, yes, that is the biggest opportunity. I think you've heard that in previous proposals. I think you heard that on the KCS quarterly earnings call. And that will be one that we'll work to make as efficient and service oriented as we can. Think I we've got a track record of that and that will be our focus when this goes through.
Thanks, Patty. Thank you, Patty. Very long haul. So it's
a sweet spot for intermodal network.
Your next question comes from the line of Cherilyn Radber, TD Securities. Cherilyn, your line is open. Thanks very much and good morning. Good morning. To the extent that this transaction is, as you've articulated, lot about intermodal, just wondering if you've got an estimate of what percentage of North American consumers combined CNKCS network would reach?
I don't have it thank you, Cherilyn. I don't have it in terms of people, but we have it in terms of total accessible market. We estimate that the total accessible market is $8,000,000,000 And we also are going to be looking for growth in the carload side, but the opportunity is more into the intermodal, something that's actually as we mentioned earlier is moving by truck or competing with truck. Our biggest competitor of the North South already, whether you have a merger or not, is we're competing with truck. We're competing with long haul truck or combination of trucks.
So that network that we want to put together can address that $8,000,000,000 total accessible market and that's based on public information. We obviously haven't had the ability to have the exchange with the KCS team as a solid team, but we're confident that we can convert a significant amount of that. And then the remaining is color related. As Rob mentioned, petrochemicals, metals, when you're looking at the automotive sector in North America with the USMCA agreement right now, you have to have a higher content of North American parts and you have to have a higher content of aluminum and steel going into each finished vehicle. And automotive sector, at least in the business of this transaction would also be a significant component.
I don't know, Rob, if you wanna add something to
Yeah. I think you I
think you answered it. Nothing there.
Maybe if I could ask just a quick follow-up. The billion of revenue synergies, could you give us a feel for how much of that is intermodal versus carload?
So roughly, it's about 80% revenue related, 20% cost. And of the 80% related, it's about 75%, intermodal in that range. Thank you. That's all for me. Thank you.
Your next question comes from the line of Ken Hoexter with Bank of America. Ken, your line is open.
Good morning, Ken.
Hi, good morning. Just a big part of the mergers we've heard about have been about enhancing competition. Can you talk about your thoughts on the environment and then walk through the process?
Yes. On the regulatory process, Sean can give you some color into that. Sean?
Sure. Thanks a lot, Ken. Clearly, it's about enhancing competition and being pro competitive. This is a growth story. And very much with the expertise of my colleagues and our experience in having done several acquisitions that required STB approval, we're comfortable that we can make the case of showing how the smallest classmen railway joining CN will provide additional choices to shippers and customers across North America and in The U.
S. And that's ultimately a test the STB will look at is, is there enhanced competition? And we've shown in the past that when we have issues at the STB or application and we sit down with the shippers and the customer associations and talk about what's required, we have taken steps to mitigate both from a competitive point of view when required, but also from an environmental assessment point of view. And not the regulatory risk per se overall, it is not any worse or any more complicated than what the CPA is proposing. It's exactly the same process with the Rolling Trust and ultimately down the road a control approval by the STB.
One major difference is that CN does not require a shareholder approval, contrary to CP in their transactions. So in this case, the same exactly same STB structure and STB risk, no different, both the willing trust and the control. And secondly, no shareholder proposal, which we think makes this transaction or this bid a better proposal on the basis that there is less execution risk.
Thank you. Thank you. Thank you, Ken.
Your next question comes from the line of Allison Landry with Credit Suisse. Allison, your line is open. Morning. Thanks. So, I mean, I
I guess there's the possibility for for CP to make a a counter bid. So I was wondering if you could just talk about your preparation for that, and how much that sort of thought process was, a part of the $3.25 per share that you guys arrived at?
So, Allison, our focus is on KCS. The KCS Board of Directors and the KCS shareholders and the KCS employee. What we're putting together here today is, in our view is a superior bid and it's based on a superior business plan to go after a bigger total accessible market and really create a strong North American growth story, A story that's coming in the right time, beginning of a rising tide economically post COVID, NAFTA, USMCA, near shoring. And it's in that mindset that we are working here today. So our focus is with KCS and creating value for them through this offer.
And that's what this today is all about.
Okay. Thank you.
Thank you.
Your next question comes from the line of Brian Ossenbeck with JPMorgan. Brian, your line is open.
Good morning, Brian. Hey, good morning.
Thanks for taking the question. Just to clarify on Slide 12, can you say if that's $6,000,000,000 of truck rated freight? Or is that a $6,000,000,000 rail equivalent number? And then just if you can find if you can put some context around rather the average length of haul, maybe across some of those end markets, that would be helpful. You mentioned some of them which are quite long.
But I don't know if you have an average that you could look at
maybe across some of those buckets.
Yes, Rob could give you some color. Could give you some length of haul. For example, we propose to connect Kansas City to the East Coast trade with vessel coming in Port Of Quebec City, Port Of Montreal, that's 1,500 mile Quebec City to Kansas City. We think there's a play for Lazaro Cardenas to be a player in the import market in Houston, that's 1,400 mile. St.
Louis, Patuzzi to Detroit for parts going back in both directions, 2,300 mile. And if you're talking about consumer goods or a food related product between Toronto and Mexico City, way you're talking about 2,800 miles. So these are really, really intermodal friendly once you create a single line service that would be best in class. Rob, you want to maybe add some more question on the Slide 12? Yes.
So in terms
of length haul, we see opportunities on cross border traffic coming out of Mexico to the Upper Midwest. That would be long haul traffic going to Michigan, Ohio area, but also Southern Ontario as well. There will be also opportunities of Chicago going east out of there with a lot of stuff that's trucked cross border into the Upper Midwest. So those are the primary areas we see it. The total number there we get is from public information there.
So as we go further in the process, we'll get further details on this. Thanks for
the question. And maybe to add Brian, just on Page 10, pay attention to our track record the last ten years from 2010 to 2020. What we did at CN in terms of growing intermodal volume. This a skill that we have at CN as much as the operating department with Rob coming in from the end when he ran the LA Long Beach of Chicago, best in class service or the commercial team of CN already grew intermodal in the last decade in a really meaningful way. Thank you.
Your next question comes from the line of Scott Group with Wolfe Research. Scott, your line is open.
So morning, just a few things. Have you spoken with KSU before taking this off for public? I'm just wondering if you have an initial sense on their reaction. Did you try and engage with them last year when it first became apparent that they were in play? And then from a regulatory standpoint, just a couple of things to clarify.
Are you gonna try and do this with the waiver or not? And then don't why don't you think this is somewhat of a tougher regulatory process given you've already got a North South route?
How do you guys know if is okay? Yeah. Thanks.
Yeah. Sean, want to talk about the regulatory process Sure, and the voting
Scott. So first question about the waiver. My question deals with whether or not the 2,001 rules will apply to the KCS approval by the STB. And as you know, that is currently part of the STB. They will make a decision soon on whether or not those rules apply, the new rules or the old rules.
We're very confident that in the event that the STB were to decide that the waiver is not being granted and you have to proceed under the new rules, that notwithstanding that we have a situation where enhanced competition will lead to even the new rules, the transaction being approved by the STB. And to give you an example, Scott, the competition issues are the fact that we have a certain amount of tracks that are they're 400 miles apart, KCS and our tracks into the Deep South. Obviously, they serve different markets, different customers. There's only about 1% of the networks between KCS and CN that overlap, 65 miles out of 7,500 miles. So on that basis, clearly, we'll have to address issues that are raised by customers and various stakeholders.
But we're confident that we have, again, in the past done so on IC, WC, the EJ and E, where there have been steps we've taken to mitigate some of the issues raised. And we think it's very, very, very small in the overall scheme of things. This is about growth. It's pro competitive, very little overlap, and it does provide great solutions and alternatives for shippers, customers in The U. S.
But also across North America. So confident that we can make a very strong case with the STB. And as various stakeholders have views being made to the STB, we can address them To the point where we settle any outstanding issues that we have to address that by way of mitigation factors with the the application itself, the decision by the STB ultimately will impose those conditions if required.
Your next question comes from the line of Brandon Oglenski with Barclays. Brandon, your line is open.
Good morning, Brandon.
Hey. Good morning, JJ. Just wanted to ask very quickly, you know, with the focus on financial returns. I understand this could be a great operational asset for you, but, you know, paying the right price matters, you know, down the road to get returned out of it. So can you talk to, you pretty lofty valuation that you're bidding at here?
Yes. So Ghislain, we'll take it. Yes, Brendan, thanks for the question. Listen, when we run the financial model, and again, we're working with some of the publicly available information as we speak, we're more or less on the return standpoint, more or less in line with our internal threshold. And as you know, our internal ROI threshold at Centimeters on new projects is in the range of about 12%.
So we're in that range. Obviously, as JJ mentioned, we haven't engaged with the team of KCS. So we need to firm up those numbers hopefully as we move forward. But this is what we're looking at as we speak. You.
Thanks for the question, Brian. Thank you.
Your next question comes from the line of Tom Wadewitz with UBS. Tom, your line is open.
Morning, Tom.
Yes. Good morning. Congratulations on the bid as well. It's, you know, an aggressive move, interesting to see. How do you think about the import I guess two questions.
How do you think about the importance of voting trust? Sounds like the d you know, the DOJ, input seems skeptical of the voting trust, but, you know, it's certainly not necessary for you to have a voting trust to pursue this deal. And then the other question is just on the synergies. You know, we did some work on the the gateways. It would seem like you'd have a lot of opportunity to flip some interchange business over from other railroads onto your system from, say, you know, Laredo to Chicago, Laredo to Detroit.
Is that potentially know it be carload, not so much intermodal. Is that maybe a greater opportunity than you're kind of characterizing? Thank you.
Thank you. I think you had a few questions in that one question. Let me see if I can peel off some of that. So there is kind of opportunity in our base case that we put in about 20% of the revenue side. Mean, as you know, we you start with a project and as you work eventually with the team in the QCS, we really want to have a positive outreach value creation outreach to QCS shareholders, but also the management and create a partnership.
So there might be more color of opportunity than what we have in our base case scenario, that's possible. On the merger side, we are proposing to put together a vanilla non voting trust for the transaction. That's what is actually in the offer. And in terms of the overlap, it's very limited. As Sean mentioned, it's basically less than 70 miles of overlap.
We've been in front of the STB a few times in the last two decades of our transaction. And at CN, we are very solution focused. We will find solution to these minor issues. Regarding the gateway, the gateway will remain open. You win business on superior service when you have a seamless single line service.
Typically if railroad well, you should be able to have a product that's appealing on its own right. So it doesn't have to be at the expense of a commercial tactic if you wish. Best service win and the Continental Railroad, the premier railroad between these three country, North South, that's really what's appealing. Where in North America, the next decade is for the service sector, the consumers and these three countries should have a very strong ecosystem of economic growth and that's what this is all about. You would like to pick up the freight where it would really originate, which is not Laredo, which is somewhere deep in Mexico.
And you would like to deliver the freight where it terminates, which is not Chicago, which is somewhere either in Eastern Canada, Western Canada or U. S. Midwest. And that's really what we want to do is create a true intermodal service that address the true origin destination market, not just the piece in between. Sean, I don't know if you want to add to the regulatory process.
Maybe Tom, thank
you very much. And yes, we do obviously recognize that DOJ has made a filing already. Loading trust and Class I mergers have been used extensively over the years. As you know, we used it we acquired the IC, which was really in 1998. Clearly, a plain vanilla voting trust structured in the right fashion with the appropriate safeguards and appropriate trustee can, in our view, be in the public interest in a situation like this one where effectively you're not going to gain control over the KCS until basically it approves the control application.
And I think our track record shows and I see that that was a very successful transaction and the voting trust was used in an appropriate fashion. So I understand very well and respect the arguments put forward by DOJ. Ultimately, the STB will decide on this. And we think that based on previous precedents and also the fact that you can make a case, it is in the public interest that this transaction proceed at the voting rights of the vehicle that has been tried and tested. And if done right, can protect the interest of all the parties involved.
So very confident that when time comes, the STB will rule will rule in favor of voting trust and will do so either based on the old rules or new rules. The only difference will be making the case that it is in the
public interest to have a voting trust under the new rules. Thank you, Tom.
Your next question comes from the line of David Vernon with Bernstein. David, your line is open.
Good morning, David. Hey, good morning. Good morning, guys. So J. K, I want ask you, as you're looking at the combination, on the cost side, do you see any opportunities to maybe either rationalize or co produce in some of the the KCS network?
And and when you think about this strategically, does this have to be a an all or nothing sort of transaction? You know, you recall back in in in Conrail when CSX and Norfolk were fighting over that thing eventually, it ended up being a little bit of a a a carve up opportunity. You know, as you guys think about the opportunity with KCS, and do do you would you rule out any potential sort of collaboration with CP in terms of of of maybe breaking up the the SP or or sharing it in some way?
So maybe I can pick up on the last part and Rob can talk about the cost. But our focus is on KCS and the KCS shareholders and the KCS team. We would like to really create the full value of this continental network premier railroad for the twenty first century that we're talking about. So our focus is along those lines and that's the offer, the very strong offer, superior offer that we've made this morning to KCS. Rob, you want
to talk about the cost synergies? Yes, sure. So on the cost side, right now, there certainly will be opportunities on the cost side. Until we do due diligence with KCS, we really won't know the scope of that. So what you've got in there is what we've got access to.
But I'd just go back to this is a story about growth. And when you look at the synergies of what we've got proposed here, it's on the revenue side, it's on moving more freight on rail. And that's really what's driving the synergies is more of the revenue side than the cost side. So we'll have to check back in on the side when that time becomes available to us. Thanks
for the question.
Your next question comes from the line of Jason Seidl with Cowen. Jason, your line is open.
Thank you so much. Good morning, gentlemen. Good morning, Jason. Our Tuesday is interesting. So wanted to focus a little bit on, you mentioned Prince Rupert and $800,000,000 I think, the revenue synergies side.
You said 80% of that is how much more CapEx potentially would be required if Prince Rupert will become sort of the go to West Coast Port because of this taking some potential business from Vancouver or some of the West Coast ports in The U. S? I know it's single line. Would you have to double track that? And would that port need to be expanded beyond the original plans that we have now for expansion?
Or is everything sort of already in place for that down the road?
Yes. So thanks for the question. There is some capital program that we have in our base case scenario that is about upgrading track to make it very intermodal friendly, intermodal capable. I don't know if when you talk about Prince Rupert, it's not so much about Prince Rupert. The example that was giving was more about connecting Kansas City to the East Coast via Montreal and Quebec City ports or really try to make Lazaro Cardenas a player in the market of Houston.
But Ghislain, you want to talk about the capital?
Yes. Thanks JJ. Listen, we are continuing to assume at CN that we will continue to invest roughly or 20% of revenue. We need to do that. We need to continue to invest in Western Canada.
Rupert is continuing to grow. Jason, as you know, another 450,000 TEUs have come in onboard in the next few years. And to JJ's point, in our financial model at this point, we are assuming some extra capital that would be required mostly to upgrade the line between Kansas City and Chicago. But again, this is to be firmed up as we have as we start working hopefully with the team in KCS. Thanks for the question, Jason.
Maybe Randy may want to add just based on our I mean, both railroads, KCS and KCS have a base case capital programs in the next few years. And the plan is actually maintain that.
You want to expand maybe on what just Lane said? Yes. So as far as Prince Rupert, we have been investing not just this year, but last year as well in terms of increasing the capacity really West Of Edmonton. And even before we announced this, we already had plans in place to continue to increase that infrastructure. As we look at the combined network, we'll look at where the opportunities are and make the best investment that gets the return on investment that is needed.
But until we really sit down with the KCS team and understand their capital plan and where the growth will be and where the opportunity is, we'll be in a better position to answer it at
that time. Thanks. You, Your
next question comes from the line of Justin Long with Stephens. Justin, your line is open.
Thanks and congratulations on the proposal. Wanted to ask a question on the accretion. So I know you said once the synergies are fully realized that you expect double digit accretion. But I was wondering if you could help us with the order of magnitude, if this is something slightly north of 10% or any kind of clarity you could give us there? And then just one on the approval process.
CP has talked about not needing approval from the Mexican rail regulator. Just curious if you share that same view. Thanks.
Okay. So Ghislain will do the financial aspect and Sean will cover the Mexican regulation.
Yes. Thanks, Justin. Listen, on the accretion, it's in the double digit range as Rob mentioned. And this is on EPS, on cash EPS, meaning that it excludes purchase price allocation. So it's on a cash basis and it's well into the double digit range.
Maybe Sean on the regulatory?
Yes, sure. On the Mexican approvals, in Mexico, it does require a notifiable transaction with the competition authorities and you need consent to assign the concession. So based on our advice and our assessment of the approvals, they are required, but we're confident that putting the case forward that this is pro competitive, it's enhancing competition and giving access obviously to a North American network, I think will allow us to convince the Mexican authorities that this is a beneficial transaction for Mexico shippers, exporters as well also for the fact that it will enhance competition by providing other choices to shippers across North America and profit we can get the approvals required. Would be nothing should take for granted, we want to make sure we make the case and we'll do so in a very proactive fashion with the Mexican authorities.
Thank you.
Your next question comes from the line of Kanark Gupta with Scotiabank. Kanark, your line is open.
My quick question is really on initial shipper reaction, if you heard any to support or kind of looking at this deal. And then what sort
of mitigation strategy, Sean, do you
think you might need to satisfy any antitrust concerns?
Yes, maybe on the customer side, it's too early. The announcement is only made at 07:00. And at this point, we're engaging with KCS and with shareholders, but we will do the engagement with customers very early on in this process. Sean, you want to talk about the areas of where we're at and how we things we have in mind?
Well, thank you very much for your question. And like I said, very much a growth story, pro competitive, creates options. The fact that 1% of the network really overlaps, like we said, 70 miles out of 7,000 miles. In our experience in the past, clearly, various stakeholders will submit requests and you have
to deal with them one at
a time and address the issues with the SCB and their submissions. Our experience has been, if you look at IC, but also EG and E, the mitigation has to be addressed the concerns has raised. The SCB will ensure that if there are any competitive issues, and we think they're very de minimis, very small. But if we have to take up, put in place mitigation measures, we'll be doing so like we have in the past. And I think it's important going into the STB, with an open mind, willing to proactively address concerns as they're raised.
But our initial assessment, and we've known this property for many years, is that there are very few issues that will give rise to mitigation from a competitive point of view. And when it comes to other concerns people might have, I think be it the environmental or community involvement that we have shown on the AG and E our capability of arriving with the settlement agreements with the communities up and down the line. And in this case, will be no different both from the community perspective but also from a shipper customer perspective. We think that the mitigation can be addressed and we'll do so in a very proactive and constructive fashion with the SPV and our customers and other stakeholders.
That's right. We are customer focused and we will find pragmatic solution to what needs to happen. Thank you for the question.
Your next question comes from the line of Bascome Majors with Susquehanna. Bascome, your line is open.
Morning, Bascome.
Oh, sorry. I was muted, guys. Thanks for taking my questions here. I just want to clarify two earlier comments that you made in the Q and A. Number one, if you're able to reach a deal with the KCS board, will you ask for a waiver in the application of the old rules under the SDV approval process?
And number two, you talked about network overlap. Do you have numbers or an estimate of the two:one, kind of three:two situations that you might be dealing with? I know you talked about miles, just thinking about customer numbers. Thank you.
So I'll ask Rob to talk about the overlap and quantify that a little more. And then Sean will talk about the STV process.
Yes. On the overlap, Bascome, it's really the parallel lines between Baton Rouge, Louisiana and New Orleans. But more specifically, it's about five customers and nine plants that are jointly served. So we'd there's a number of options we can do to remedy that. But that's really the only place the rest of the network is truly end to end and that place can be solved via a number of options.
Yes, Pascal, thanks for the question. It is current and part of the STB, as you know, the question of whether or not the waiver will be granted will be something that the STB will decide. And we at CN, with the decision of STB, obviously respect the decision to decide to grant the waiver, we'll proceed on that basis. But also, I want to be very clear that if the STB were to rule that the waiver should not be granted and we have to proceed under the new rules, both for the voting trust and the ultimate decision of the STB under control, CN is confident that in both cases, we can demonstrate that the voting trust is in the public interest. And based on the new rules, as Rob explained very well, this is pro competitive, but based on the new rules, we still will be able to convince the STB and all the stakeholders involved that this is a pro competitive transaction and we can address any mitigation at that level.
But we don't think that the new rules, there might be a higher threshold, but we're confident based on our assessment of the overall network and the overlap that we can get through this transaction, ultimately get approved with the STB based on the new rules also. So the waiver will be decided by the STB and we'll proceed with or without the waiver getting the voting trust as well as approval of the transaction subject to be approved.
Your next question comes from the line of Benoit Poirier with Desjardins. Benoit, your line is open.
Yes. Good and congratulations for the announcement. Given this transaction will form the second largest Class one railroad, do you look at the risk to see other Class one looking to merge? And how would you compare the regulatory approval process with the past EG and E and Messina rail line transaction?
So Benoit, we again, as I said, this morning, we're focused on the KCS, the KCS shareholders, KCS Board and the KCS management. And what we're offering to them in terms of partnership and creating together what I would call a fantastic railroad for the twenty first century, focused on the GDP of the economy that's related to consumers, some manufacturing and really North South. I think frankly, I don't know what others might do, but we have the best proposals and solution and offers to make to the KCS family to make this happen. And in that light, I think what we have here is a way to enable the USMCA. The USMCA NAFTA agreement was a good agreement.
It was renewed recently. It got hotly contended. But what the agreement requires is really also a very strong supply chain connecting the three countries, much stronger than what exists today. And at this point in time also when the three countries are doing vast infrastructure program to restart the economy post COVID, I think this is also coming at the right time. So we're coming at the right time with the right solution, with the right combination, with a very strong plan has to do with economy of the future, not economy of the past.
And in that light, we're confident that we can create value for all the customers who are using or want to use this network and maybe too many of them today are using long haul trucks. And as far as the overlap two for one, as Rob mentioned, there are very few zone at 70 miles and we can resolve that definitely. Rob, you want to add?
Yes. So Benoit, in terms of the size of it, when you look at the total track miles in The U. S, our combined network with KCS will be less than half the track miles of the two Eastern railroads, Class one railroads in The U. S. And less than a third the track miles of the two Western railroads.
So by any way, shape or form, it's not going to be the big player here. It won't be the third largest by the way either. So just as info. Thanks, Benoit.
Yes. The DSTB regulatory process is for what's happening inside The United States. You have to look at our network inside The United States. Last question.
Our final question comes from the line of Jeff Kaufman with Vertical Research. Jeff, your line is open.
Thank you and congratulations. Thank you for taking my question.
A lot of questions have been answered, so
thank you for this presentation, but I do have one. You mentioned that the ROI is 12% as your threshold, and this is double digit accretion to you, well above that. When I look at the synergies, your synergy number is about $200,000,000 higher than the other synergy number that's out there. And you're attributing a lot of this to highway conversion. And you're also acknowledging there's going to be some mitigation costs.
There's going be some giveback of that synergy on a net basis. I'm guessing since the synergy numbers are are slightly higher for you but comparable overall, that it might be worth double digit ROI to somebody else as well. Are you basically saying that until you're, no longer a 12% ROI return on this project that you would probably be willing to continue to invest in it should the bidding go higher? Or should I not read into it that way?
Yes. Thanks for the question, Jeff. I would not speculate on next steps. I think again, we're working with these numbers and we're working with the publicly available information. So these are all have to be firmed up when we have access to the KCS team, which we hope we will have.
And I would not speculate on next steps in terms of what happens if the numbers go up or down. I think at this point, we've just issued our bid. We're very comfortable with that bid. We're very comfortable with our assumption. And we're proud of it.
And this will be firmed up as we move forward into the process. Thanks, Jeff, for the question.
Thank you, Jeff. And maybe operator, if I could wrap it up here. So thank you all of you for joining us today. And CN this morning is really putting out what we believe is a better bid with a better railroad, with a better being a better partner for KCS and overall being the best solution for KCS and its shareholders and the North American economy. We really want to enable the economy in North America focus on more North South, the USMCA.
And it's an atmosphere today that we're reaching out in a very positive manner to the KCS Board, KCS shareholders and the KCS management, asking them, offering them to look at our very compelling offers, not only just financial offer, but partnership offer to build together the railroad of the twenty first century. So thank you for the time and there are more to come in the days and weeks to come. Thank you.
This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.