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Mexico could benefit from China’s exclusion from supply chains

The chunks metal being worked on do not look terribly special. But the factory of Aerospace, a chemical-processing firm in Tijuana, hints at Mexico’s importance to global supply chains. These are components, from tray tables to door parts, for aircraft made by companies including Boeing, Cessna and Lockheed Martin. BAP applies surface treatments to the pieces, from submerging them in big vats of chemicals to meticulous work done by hand, before shipping them north.

Mexico has long been a hub for manufacturing. Toyota, a Japanese carmaker, has had a plant in Tijuana since 2002. Honeywell, an American industrial giant, opened one in 2010. But increasingly the country is moving into higher-value processes. It now accounts for 3-4% of aerospace imports to the United States, up from 1.5% in 2010. By contrast China’s share, which was the same as Mexico’s a decade ago, is now just 1%. American sanctions on China and tariffs on Chinese goods explain much of this change, as well as rising wages in China and the difficulty of doing business there. The trend has accelerated recently. Pandemic-induced border closures, increased freight costs, and consumers’ demands for instant gratification have all nudged firms around the world to consider shortening their supply chains.

“This is a golden opportunity for Mexico,” says Helen Wang, a consultant. The country has some natural advantages, not least a long land border with the United States. Mexico is party to fully 23 free-trade deals. Manufacturing wages are lower than in China. A survey this year by the American Chamber of Commerce of Shanghai found that a fifth of its members were considering moving some work out of China; more than a third of those who were thinking of moving were looking to Mexico.

In Tijuana the mood among many Mexican businesspeople is optimistic. Several big firms have expanded recently. Panasonic, a Japanese electronics company, opened a plant in 2018 to make cables for aerospace. Other companies are diversifying into logistics and distribution. In September this year Amazon, an e-commerce giant, opened a warehouse there, though the company denied that it would use it to serve customers in the United States.

In addition to aerospace, the manufacturing of medical devices and other electronics is booming. “We are doing things [in Mexico] that once would have had to be done in Japan or Germany,” boasts Eduardo Salcedo, the manager of the local operations of Össur, an Icelandic medical-devices company. “We have guys running a million-dollar machine with their right hand and another one with their left hand.”

Chain reaction

The result is that the richest part of the country, by the border, is becoming even better off. “Northern Mexico is growing at similar rates to Asia,” says Luis de la Calle, a consultant who used to work at Mexico’s economy ministry. Elsewhere, however, the picture is mixed. FDI fell from 3.1% of GDP in 2018 to 2.3% in 2019, compared with 3.7% in Brazil or 6.2% in Vietnam.

And despite its proximity to the United States, Mexico has its shortcomings. Business parks provide world-class facilities but the infrastructure outside—from roads to ports—is of poor quality, says Mr de la Calle. Businesses complain of problems obtaining inputs. The likes of Panasonic and Össur import many of the materials they need. Similarly Össur nearly pulled out of Tijuana because it could not find a company to apply chemical processes to its products, which include prosthetics. (BAP eventually stepped in.)

Some of the causes of Mexico’s problems are outside its control. When the government of the United States talks about “near-shoring”, it really means onshoring, says Bill Reinsch of CSIS, a think-tank in Washington. It can be protectionist in negotiations with Canada and Mexico. USMCA, the revised trade deal agreed in 2020 between the three countries, is stricter than its predecessor, NAFTA—indeed it was negotiated in part to preserve manufacturing jobs in the United States.

But Andrés Manuel López Obrador, Mexico’s populist president, has not helped. In 2018 his administration replaced one of the most business-friendly (if corrupt) governments in Mexico’s history, that of Enrique Peña Nieto. Mr López Obrador, in contrast, seems to enjoy unnerving investors.

Soon after taking office he cancelled a new airport for Mexico City, after the diggers had been working for three years, at a cost of at least $5bn. In 2020 he also pulled the plug on a $1.4bn investment in a new factory by Constellation Brands, an American brewer, which was near completion. He has weakened independent regulators by absorbing them into government or slashing their budgets.

Mr López Obrador is also reversing his predecessor’s opening of the energy industry to private firms and favouring inefficient state-owned outfits. Along with making electricity dirtier and less reliable, this sends forbidding signals to investors. In November the boss in Mexico of General Motors (GM), an American carmaker, said the company would not invest further in the country without laws that promote renewable energy. Earlier this year GM had said it would invest more than $1bn to make electric cars in Mexico from 2023. Last year Tesla, a leading maker of such cars, considered opening a factory in Mexico but opted instead for Texas. Although Tesla did not explain its reasons, Elon Musk, its boss, has grumbled about the Mexican government’s closure of some of the factories of its suppliers during covid-related lockdowns.

Mexico risks “shooting itself in the foot” by not taking advantage of shorter supply chains, says Michael Camuñez, who started a series of meetings to boost the economic relationship between Mexico and the United States during Barack Obama’s administration. (Mr López Obrador and President Joe Biden relaunched this “economic dialogue” in September.) Unfortunately it is Mr López Obrador who has his finger on the trigger and, if his past treatment of foreign investors is any guide, seems likely to pull it. 

This article appeared in the The Americas section of the print edition under the headline “Missing links” in the economist

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Canadian Pacific and Kansas City Southern Execute Agreement to Combine, Creating First Single-Line Rail Network Linking U.S.-Mexico-Canada

Stock and Cash Transaction Represents an Enterprise Value of Approximately $31 Billion

Expected to Create Annualized Synergies of Approximately $1 Billion within Three Years

Historic Combination Enhances Competition, Creates New Options for Customers, and Supports Economic Growth in North America


Companies to Host Investor Conference Call Thursday at 8 a.m. ET


CALGARY, Alberta & KANSAS CITY, Mo.–(BUSINESS WIRE)–Canadian Pacific Railway Limited (TSX: CP, NYSE: CP) (“CP”) and Kansas City Southern (NYSE: KSU) (“KCS”) today announced they have entered into a merger agreement, under which CP has agreed to acquire KCS in a stock and cash transaction representing an enterprise value of approximately USD$31 billion1, which includes the assumption of $3.8 billion of outstanding KCS debt. The transaction, which has the unanimous support of both boards of directors, values KCS at $300 per share, representing a 34% premium, based on the CP closing price on Aug. 9, 2021, the date prior to which CP submitted a revised offer to acquire KCS, and KCS’ unaffected closing price on March 19, 20212.

“Our path to this historic agreement only reinforces our conviction in this once-in-a-lifetime partnership,” said CP President and Chief Executive Officer Keith Creel. “We are excited to get to work bringing these two railroads together. By combining, we will unlock the full potential of our networks and our people while providing industry-best service for our customers. This perfect end-to-end combination creates the first U.S.-Mexico-Canada rail network with new single-line offerings that will deliver dramatically expanded market reach for CP and KCS customers, provide new competitive transportation options, and support North American economic growth.”

“We are glad to be partnering with CP to create a railroad that is able to compete by providing the best value for the transportation dollar,” said KCS President and Chief Executive Officer Patrick J. Ottensmeyer. “The CP-KCS combination will not only benefit customers, labor partners, and shareholders through new, single-line transportation services, attractive synergies and complementary routes, it will also benefit KCS and our employees by enabling us to become part of a growing and truly North American continental enterprise.”

While remaining the smallest of six U.S. Class 1 railroads by revenue, the combined company would have a much larger and more competitive network, operating approximately 20,000 miles of rail, employing close to 20,000 people, and generating total revenues of approximately $8.7 billion based on 2020 actual revenues. The CP-KCS combination is expected to create jobs across the joined network. Additionally, the companies expect efficiency and service improvements to achieve meaningful environmental benefits.

Transaction to Expand Options and Efficiencies for Customers

A CP-KCS combination would provide unprecedented reach via new single-line hauls across a combined network, offering:

  • New single-line competitive options for domestic intermodal shipments between Mexico, the U.S. Midwest, and Canada, providing a truck competitive product for time-sensitive shipments in the high-value parts, perishables, and expedited markets.
  • New single-line hauls linking key automotive manufacturing and distribution centers in Mexico, the U.S. Midwest, and Canada, capitalizing on CP’s best-in-class automotive compound network.
  • New single-line routes linking energy, chemical, and merchandise shippers to more quickly and efficiently connect origin and destination facilities and reach new markets and global consumers.
  • Unmatched access to Atlantic, Gulf, and Pacific ports, linking international intermodal shippers with North America’s largest consumer markets providing new optionality, capacity, and resiliency.
  • New single-line routes allowing the efficient flow of agricultural products from CP’s origin-rich franchise to KCS’ destination-rich franchise, generating new optionality for shippers and receivers.
  • Extended reach for short line and regional railroads coupled with new optionality for non-rail served customers via our extensive transload network.

Importantly, customers would not experience a reduction in independent railroad choices as a result of the transaction. CP-KCS have committed to keep all existing freight rail gateways open on commercially reasonable terms, while simultaneously competing aggressively to attract traffic via new single-line north-south lanes between Canada, the Upper Midwest and the Gulf Coast, Texas, and Mexico.

A CP-KCS combination would preserve the six-railroad structure of the North American Class 1 rail network: two in the west, two in the east and two in Canada, each with access to the U.S. Gulf Coast. The two companies once combined would remain the smallest of the Class 1 carriers.

Improving Highway Traffic, Environmental Sustainability, and Safety

The new single-line routes made possible by the transaction are expected to shift trucks off crowded U.S. highways, lowering emissions and reducing the need for public investments in road and highway bridge repairs. Rail is four times more fuel efficient than trucking, and one train can keep more than 300 trucks off public roads and produce 75 percent less greenhouse gas emissions. The synergies created by this combination are expected to take tens of thousands of trucks off the highways annually.

CP is committed to sustainability and is currently developing North America’s first line-haul hydrogen-powered locomotive. Additionally, the combined company would maintain both CP and KCS’ pledges to improve fuel efficiency and lower emissions in-line with the Paris Agreement to support a more sustainable North American supply chain.

Creating Value for KCS and CP Shareholders

Following the closing into a voting trust, common shareholders of KCS will receive 2.884 CP shares and $90 in cash for each KCS common share held. Preferred shareholders will receive $37.50 in cash for each KCS preferred share held. The fixed exchange ratio implies a price for KCS of $300 per share, representing a 34% premium, based on the CP closing price on August 9, 2021 and KCS’ unaffected closing price on March 19, 20213.

Immediately following the closing into trust, KCS common shareholders are expected to own 28 percent of CP’s outstanding common shares, providing the ability to participate in the upside of both companies’ growth opportunities. Following final regulatory approval by the U.S. Surface Transportation Board (“STB”), KCS shareholders would also reap the benefits of synergies resulting from the combination.

The combined growth strategies of the two fastest-growing Class 1s will result in new efficiencies for customers and improved on-time performance under their respective Precision Scheduled Railroading programs. The combined company is expected to create annualized synergies of approximately $1 billion over three years.

The combination is expected to be accretive to CP’s adjusted diluted EPS4 in the first full year following CP’s acquisition of control of KCS, and is expected to generate double-digit accretion upon the full realization of synergies thereafter.

To fund the stock consideration of the merger, CP will issue 44.5 million new shares. Consistent with the previously announced transaction, the cash portion will be funded through a combination of cash-on-hand and raising approximately $8.5 billion in debt, for which financing has been committed. As part of the merger, CP will assume approximately $3.8 billion of KCS’ outstanding debt. Following the closing into trust, CP expects that its outstanding debt will be approximately $20 billion.

Pro forma for the transaction, CP estimates its leverage ratio against 2021E street consensus EBITDA to be approximately 3.9x with the assumption of KCS debt and issuance of new acquisition-related debt. In order to manage this leverage effectively, CP will continue to temporarily suspend its normal course issuer bid program, and expects to produce approximately $7 billion of levered free cash flow (after interest and taxes) over the next three years. CP estimates its long-term leverage target of approximately 2.5x to be achieved within 24 months after closing into trust. The combined company will remain committed to maintaining strong investment grade credit ratings while continuing to return capital for the benefit of shareholders.

Strong Stakeholder Support for CP-KCS

More than 1,000 stakeholders – including railroad labor unions, shippers, and community leaders – have written letters to the STB supporting CP’s proposed combination with KCS. These letters emphasize the enhanced competition and unsurpassed levels of service, safety and economic efficiency that the transaction will bring for shippers and communities across the U.S., Mexico, and Canada that a CP-KCS combination offers.

Clear Path to Complete Transaction and Merger

On May 6, 2021, the STB approved the use of a voting trust for a planned CP-KCS merger, and the pertinent circumstances surrounding this new agreement between CP and KCS have not changed relative to those underlying the STB’s decision approving a trust. To close into voting trust, the transaction requires approval from shareholders of both companies along with satisfaction of customary closing conditions, including Mexican regulatory approvals. CP would then acquire KCS and place the KCS shares into the voting trust, at which point KCS shareholders would receive 2.884 CP shares and $90 in cash for each KCS common share held. The companies expect the transaction to close and KCS shareholders to receive their consideration in Q1 2022.

CP’s ultimate acquisition of control of KCS’ U.S. railways is subject to the approval of the STB. In April, the STB decided that it would review the CP-KCS combination under the merger rules in existence prior to 2001 and the waiver granted to KCS in 2001 to exempt it from the 2001 merger rules. In August, the STB reaffirmed that the pre-2001 rules would govern its review of the CP-KCS transaction.

The STB review of CP’s proposed control of KCS is expected to be completed in the second half of 2022. Upon obtaining control approval, the two companies will be integrated fully over the ensuing three years, unlocking the benefits of the combination.

Board, Management, and Headquarters

Following STB approval of the CP’s control of KCS, Mr. Creel will serve as the Chief Executive Officer of the combined company. The combined entity will be named Canadian Pacific Kansas City (“CPKC”).

Calgary will be the global headquarters of CPKC, and Kansas City, Missouri will be the U.S. headquarters. The Mexico headquarters will remain in Mexico City and Monterrey. CP’s current U.S. headquarters in Minneapolis-St. Paul will remain an important base of operations.

Four KCS Directors will join CP’s expanded Board at the appropriate time, bringing their experience and expertise in overseeing KCS’ multinational operations.

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, García-Cuéllar, Aiza y Enríquez, 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.

Conference Call for Investment Community

CP and KCS will host a joint investor conference call Thursday, Sept. 16, at 8 a.m. ET to discuss this announcement. A live webcast of the call and the replay will be available on the CP website at https://investor.cpr.ca/events and the KCS website at https://investors.kcsouthern.com/events-calendar. Supporting materials will be posted on www.FutureForFreight.com. To listen to the live conference call, dial (877) 830-2586 in the U.S. or (785) 424-1734 internationally, passcode 74335.

A conference call replay will be available for one week following the call and can be accessed by dialing (800) 753-5212 (no passcode needed).

For information on the benefits of a CP-KCS combination, visit FutureForFreight.com.

FORWARD LOOKING STATEMENTS AND INFORMATION

This news release includes certain forward looking statements and forward looking information (collectively, FLI) to provide CP and KCS shareholders and potential investors with information about CP, KCS and their respective subsidiaries and affiliates, including each company’s management’s respective assessment of CP, KCS and their respective subsidiaries’ future plans and operations, which FLI may not be appropriate for other purposes. FLI is typically identified by words such as “anticipate”, “expect”, “project”, “estimate”, “forecast”, “plan”, “intend”, “target”, “believe”, “likely” and similar words suggesting future outcomes or statements regarding an outlook. All statements other than statements of historical fact may be FLI.

Although we believe that the FLI is reasonable based on the information available today and processes used to prepare it, such statements are not guarantees of future performance and you are cautioned against placing undue reliance on FLI. By its nature, FLI involves a variety of assumptions, which are based upon factors that may be difficult to predict and that may involve known and unknown risks and uncertainties and other factors which may cause actual results, levels of activity and achievements to differ materially from those expressed or implied by these FLI, including, but not limited to, the following: the timing and completion of the transaction, including receipt of regulatory and shareholder approvals and the satisfaction of other conditions precedent; interloper risk; the realization of anticipated benefits and synergies of the transaction and the timing thereof; the success of integration plans; the focus of management time and attention on the transaction and other disruptions arising from the transaction; changes in business strategy and strategic opportunities; estimated future dividends; financial strength and flexibility; debt and equity market conditions, including the ability to access capital markets on favourable terms or at all; cost of debt and equity capital; potential changes in the CP share price which may negatively impact the value of consideration offered to KCS shareholders; the ability of management of CP, its subsidiaries and affiliates to execute key priorities, including those in connection with the transaction; general Canadian, U.S., Mexican and global social, economic, political, credit and business conditions; risks associated with agricultural production such as weather conditions and insect populations; the availability and price of energy commodities; the effects of competition and pricing pressures, including competition from other rail carriers, trucking companies and maritime shippers in Canada, the U.S. and Mexico; North American and global economic growth; industry capacity; shifts in market demand; changes in commodity prices and commodity demand; uncertainty surrounding timing and volumes of commodities being shipped; inflation; geopolitical instability; changes in laws, regulations and government policies, including regulation of rates; changes in taxes and tax rates; potential increases in maintenance and operating costs; changes in fuel prices; disruption in fuel supplies; uncertainties of investigations, proceedings or other types of claims and litigation; compliance with environmental regulations; labour disputes; changes in labour costs and labour difficulties; risks and liabilities arising from derailments; transportation of dangerous goods; timing of completion of capital and maintenance projects; sufficiency of budgeted capital expenditures in carrying out business plans; services and infrastructure; the satisfaction by third parties of their obligations; currency and interest rate fluctuations; exchange rates; effects of changes in market conditions and discount rates on the financial position of pension plans and investments; trade restrictions or other changes to international trade arrangements; the effects of current and future multinational trade agreements on the level of trade among Canada, the U.S. and Mexico; climate change and the market and regulatory responses to climate change; anticipated in-service dates; success of hedging activities; operational performance and reliability; customer, shareholder, regulatory and other stakeholder approvals and support; regulatory and legislative decisions and actions; the adverse impact of any termination or revocation by the Mexican government of Kansas City Southern de Mexico, S.A. de C.V.’s Concession; public opinion; various events that could disrupt operations, including severe weather, such as droughts, floods, avalanches and earthquakes, and cybersecurity attacks, as well as security threats and governmental response to them, and technological changes; acts of terrorism, war or other acts of violence or crime or risk of such activities; insurance coverage limitations; material adverse changes in economic and industry conditions, including the availability of short and long-term financing; and the pandemic created by the outbreak of COVID-19 and its variants, and resulting effects on economic conditions, the demand environment for logistics requirements and energy prices, restrictions imposed by public health authorities or governments, fiscal and monetary policy responses by governments and financial institutions, and disruptions to global supply chains.

We caution that the foregoing list of factors is not exhaustive and is made as of the date hereof. Additional information about these and other assumptions, risks and uncertainties can be found in reports and filings by CP and KCS with Canadian and U.S. securities regulators, including any proxy statement, prospectus, material change report, management information circular or registration statement to be filed in connection with the transaction. Reference should be made to “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forward Looking Statements” in CP’s and KCS’s annual and interim reports on Form 10-K and 10-Q. Due to the interdependencies and correlation of these factors, as well as other factors, the impact of any one assumption, risk or uncertainty on FLI cannot be determined with certainty.

Except to the extent required by law, we assume no obligation to publicly update or revise any FLI, whether as a result of new information, future events or otherwise. All FLI in this news release is expressly qualified in its entirety by these cautionary statements.

ABOUT CANADIAN PACIFIC

Canadian Pacific is a transcontinental railway in Canada and the United States with direct links to major ports on the west and east coasts. CP provides North American customers a competitive rail service with access to key markets in every corner of the globe. CP is growing with its customers, offering a suite of freight transportation services, logistics solutions and supply chain expertise. Visit www.cpr.ca to see the rail advantages of CP. CP-IR

ABOUT KCS

Headquartered in Kansas City, Mo., Kansas City Southern (KCS) (NYSE: KSU) 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. Its international holdings include Kansas City Southern de Mexico, S.A. de C.V., serving northeastern and central Mexico and the port cities of Lázaro Cárdenas, Tampico and Veracruz, and a 50 percent interest in Panama Canal Railway Company, providing ocean-to-ocean freight and passenger service along the Panama Canal. KCS’ North American rail holdings and strategic alliances with other North American rail partners are primary components of a unique railway system, linking the commercial and industrial centers of the U.S., Mexico and Canada. More information about KCS can be found at www.kcsouthern.com.

ADDITIONAL INFORMATION ABOUT THE TRANSACTION AND WHERE TO FIND IT

CP will file with the U.S. Securities and Exchange Commission (SEC) a registration statement on Form F-4, which will include a proxy statement of KCS that also constitutes a prospectus of CP, and any other documents in connection with the transaction. The definitive proxy statement/prospectus will be sent to the shareholders of KCS. CP will also file a management proxy circular in connection with the transaction with applicable securities regulators in Canada and the management proxy circular will be sent to CP shareholders. INVESTORS, STOCKHOLDERS AND SHAREHOLDERS OF KCS AND CP ARE URGED TO READ THE PROXY STATEMENT/PROSPECTUS AND MANAGEMENT PROXY CIRCULAR, AS APPLICABLE, AND ANY OTHER DOCUMENTS FILED OR TO BE FILED WITH THE SEC OR APPLICABLE SECURITIES REGULATORS IN CANADA IN CONNECTION WITH THE TRANSACTION WHEN THEY BECOME AVAILABLE, AS THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT KCS, CP, THE TRANSACTION AND RELATED MATTERS. The registration statement and proxy statement/prospectus and other documents filed by CP and KCS with the SEC, when filed, will be available free of charge at the SEC’s website at www.sec.gov. In addition, investors and shareholders will be able to obtain free copies of the registration statement, proxy statement/prospectus, management proxy circular and other documents which will be filed with the SEC and applicable securities regulators in Canada by CP online at investor.cpr.ca and www.sedar.com, upon written request delivered to CP at 7550 Ogden Dale Road S.E., Calgary, Alberta, T2C 4X9, Attention: Office of the Corporate Secretary, or by calling CP at 1-403-319-7000, and will be able to obtain free copies of the proxy statement/prospectus and other documents filed with the SEC by KCS online at www.investors.kcsouthern.com, upon written request delivered to KCS at 427 West 12th Street, Kansas City, Missouri 64105, Attention: Corporate Secretary, or by calling KCS’s Corporate Secretary’s Office by telephone at 1-888-800-3690 or by email at corpsec@kcsouthern.com.

You may also read and copy any reports, statements and other information filed by KCS and CP with the SEC at the SEC public reference room at 100 F Street N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-732-0330 or visit the SEC’s website for further information on its public reference room. This news release shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to appropriate registration or qualification under the securities laws of such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the U.S. Securities Act of 1933, as amended.

NON-GAAP MEASURES

Although this news release includes forward-looking non-GAAP measures (adjusted diluted EPS and earnings before interest, tax, depreciation and amortization (EBITDA)), it is not practicable to reconcile, without unreasonable efforts, these forward-looking measures to the most comparable GAAP measures (diluted EPS and Net income, respectively), due to unknown variables and uncertainty related to future results. Please see Note on forward-looking statements above for further discussion.

PARTICIPANTS IN THE SOLICITATION OF PROXIES

This news release is not a solicitation of proxies in connection with the transaction. However, under SEC rules, CP, KCS, and certain of their respective directors and executive officers may be deemed to be participants in the solicitation of proxies in connection with the transaction. Information about CP’s directors and executive officers may be found in its 2021 Management Proxy Circular, dated March 10, 2021, as well as its 2020 Annual Report on Form 10-K filed with the SEC and applicable securities regulators in Canada on February 18, 2021, available on its website at investor.cpr.ca and at www.sedar.com and www.sec.gov. Information about KCS’s directors and executive officers may be found on its website at www.kcsouthern.com and in its 2020 Annual Report on Form 10-K filed with the SEC on January 29, 2021, available at www.investors.kcsouthern.com and www.sec.gov. These documents can be obtained free of charge from the sources indicated above. Additional information regarding the interests of such potential participants in the solicitation of proxies in connection with the transaction will be included in the proxy statement/prospectus and management proxy circular and other relevant materials filed with the SEC and applicable securities regulators in Canada when they become available.

1 Except where noted, all figures are in U.S. dollars.
2 Based on KCS closing share price of $224.16 as of March 19, 2021 and CP closing share price of CAD$91.50 (at 1.2565 FX rate) as of Aug. 9, 2021.
3 Based on KCS closing share price of $224.16 as of March 19, 2021 and CP closing share price of CAD$91.50 (at 1.2565 FX rate) as of Aug. 9, 2021.
4 Accretion based on adjusted diluted EPS excluding one-time advisory, financing, and integration costs as well as incremental transaction-related amortization.

ARTICLE FROM BUSINESSWIRE

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Kansas City Southern accepts new Canadian Pacific offer

The offer is worth less but is more likely to get the go-ahead from regulators

The battle to buy United States railroad Kansas City Southern (KCS) has taken a fresh turn after the company accepted an improved offer from Canadian Pacific (CP), trumping a higher value offer from rival Canadian National (CN).

CP had originally agreed to a US $29-billion deal to take over KCS in March, only for Canadian National (CN) to come in with an improved $33.6-billion deal in May, which KCS accepted. However, that agreement left open the option of switching for a “Company Superior Proposal” pending further offers, which allowed CP to strike a new agreement with KCS.

The new CP offer is worth a more modest $31 billion, but is thought more likely to secure the green light from regulators, who rejected a key part of the CN’s offer last month. CN had three days to make amendments to its deal to quash the rival CP proposal. Both offers include the assumption of about $3.8 billion in KCS debt.

Either deal will be a game changer for North American railway industry. Both agreements would connect ports in Mexico, the United States and Canada, and create a direct line between ports south of Mexico City through the continent to Canada, which both CN and CP cover comprehensively.

Canadian Pacific CEO Keith Creel said he was satisfied to reach a deal. “We are pleased to reach this important milestone and again pursue this once-in-a-lifetime partnership,” he said.

“This merger proposal provides KCS stockholders greater regulatory and value certainty,” he added.

In Mexico, KCS transports freight to and from the ports of Tampico and Altamira in Tamaulipas, the port of Veracruz, and from the Pacific port of Lázaro Cárdenas in Michoacán through its wholly-owned subsidiary Kansas City Southern de México. But primarily it operates trains between the Valley of México and the El Bajío industrial region, taking automotive and industrial products into the United States via Texas.

CP began operating in 1881 and has approximately 20,100 kilometers of track in the United States and Canada, and acquired lines in the U.S. in 2009.

KCS is the smallest of the major freight railroads in the U.S, with 10,800 kilometers of track in the U.S. and Mexico.

CN is Canada’s largest railway company, spanning 32,831 kilometers of track. It gained control of the U.S. Illinois Central railroad in 1998, and Bill Gates is its biggest shareholder.

FROM MEXICO NEWS DAILY

 

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México coproducirá semiconductores con Estados Unidos

Adiconalmente, ambos gobiernos sostienen conversaciones sobre qué tanto Valor de Contenido Regional se le asignaría a México en estos proyectos para el cumplimiento de las reglas de origen en el Tratado entre México, Estados Unidos y Canadá (T-MEC).

México coproducirá semiconductores con Estados Unidos y, para ello, la secretaría de Economía, Tatiana Clouthier, se reunirá esta semana con varias empresas interesadas en Washington, DC.

Al respecto, el gobierno mexicano ha conversado con su contraparte estadounidense sobre la producción en México de “una parte importante” de los semiconductores y software en esa misma industria.

Al mismo tiempo, ambos gobiernos sostienen conversaciones sobre qué tanto Valor de Contenido Regional se le asignaría a México en estos proyectos para el cumplimiento de las reglas de origen en el Tratado entre México, Estados Unidos y Canadá (T-MEC).

El impulso de inversiones en esta industria ocurre luego de que la alta demanda de equipos electrónicos y de conectividad de red a nivel mundial originada por la pandemia de Covid-19 propició, a su vez, un desabasto de chips semiconductores para la industria automotriz.

Paralelamente, el gobierno estadounidense modificó las reglas para restringir la capacidad de Huawei de contratar chips semiconductores de instalaciones en el extranjero que utilizan tecnología estadounidense, como Taiwan Semiconductor Manufacturing Company (TSMC).

“¿Qué hemos planteado? Dos cosas: hacer una pieza importante y vincularla con la cadena de producción en Estados Unidos y, por otro lado, la parte de la programación; una parte en Jalisco y otra en Baja California”, dijo Clouthier este lunes en un foro organizado por Expansión.

Como una reacción a la carestía global de semiconductores, Estados Unidos atrajo inversiones por 32,000 millones de dólares en la construcción de esas piezas.

Por una parte, el gobierno de Estados Unidos negoció con la empresa taiwanesa TSMC para construir una fundición de chips de 5 nm de 12,000 millones de dólares en Arizona.

Además, Intel informó que invertirá 20,000 millones de dólares en la instalación de dos plantas de semiconductores, ambas también en Arizona.

“Si nosotros le vamos a meter (en la coproducción), cuál va a ser el compromiso que en el producto final me vas a dar, (qué) tanto porcentaje?, añadió Clouthier, en alusión a sus conversaciones con funcionarios estadounidenses.

Ya desde la anterior visita de Clouthier a Washington a finales de julio pasado, ella abordó con la secretaria de Comercio de Estados Unidos, Gina Raimondo, asuntos relacionados con la fabricación de semiconductores y las cadenas de suministro. A partir de entonces, se formaron grupos técnicos que están visualizando esta parte.

El Congreso estadounidense incluyó disposiciones en la Ley de Autorización de Defensa Nacional para el año fiscal 2021 a fin de impulsar las capacidades de Estados Unidos.

Fuente: El Economista

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The Case for a Pan-American Manufacturing Ecosystem by Bindiya Vakil, Tom Linton, and Dale Rogers

As the U.S. economy emerges from Covid-19-related lockdowns and subsequent supply chain disruptions, business leaders are beginning to develop a roadmap for redesigning their global supply chains with the aim of making them more resilient, environmentally sustainable, and agile. This endeavor, combined with the Biden administration’s goal of making critical sectors of the U.S. economy more self-reliant and less dependent on China, will require public-private partnerships and hundreds of billions in government investments, subsidies, incentives, and sourcing mandates.

But the United States can’t achieve these goals alone. They will require it to collaborate and strengthen trading partnerships with countries in North America, Central America, and South America and build a reliable, cost-effective land-based transportation network that connects the three Americas. Only with strong partnerships and a Pan-American transportation network will the United States be able to bring manufacturing home from Asia. This reconfiguration would benefit all involved: Creating jobs and promoting political stability in poor countries in the Americas would also build wealth in these nations and slow migration from them to the United States.

In a slew of sectors, the only way to develop cost-effective manufacturing in the United States is for those factories to be fed by an ecosystem of low-cost suppliers located in Central and South America rather than Asia. Given the long transit times from suppliers in Asia, it’s unrealistic for U.S. factories to depend on them. Nor is it realistic to expect a major chunk of the supply base now in Asia to relocate to the United States. That’s because the United States doesn’t have the population needed to support a large-scale factory and logistics infrastructure: The average age of its population is 38.5 — much older than that of the labor force in emerging economies — and more flexible service-sector options would make it difficult to find the huge amount of workers to consistently fill factory and logistics jobs such as trucking.

Leveraging Mexico’s and Central America Younger Populations

Mexico and countries in Central America do have the population and demographics to support a large-scale manufacturing and logistics sector. Their workforce is much larger and younger — the average age across Central America is 24 to 28. The labor cost of manufacturing in Mexico is now equivalent to that of China, and in parts of Central America, such as Honduras, it is even lower. Millions of poor Central Americans are desperate for legal job opportunities, and local manufacturing work would be welcomed, especially by communities now plagued by drug trafficking and production. The establishment of a robust manufacturing sector in these countries would also provide their governments with the resources to build professional security forces with the capability to root out drug cartels.

Creating better economic opportunities and reducing crime and corruption would undoubtedly reduce the emigration from those countries to the United States. And a thriving large middle class with spending power would present U.S. companies with a large market close to home.

Finding Sources of Renewable Water

Another consideration in building a robust manufacturing system that encompasses the Americas is the availability of water — an existing problem that seems certain to grow worse due to global warming. Manufacturing requires large amounts of renewable water, and in many parts of the U.S. West and Southwest, water availability is severely constrained.

Canada and the U.S. Great Lakes region have significantly more water. South American countries such as Brazil, Colombia, and Peru rank among the top water-rich countries in the world. According to the Global Water Partnership (GWP), nearly a third of the world’s renewable water resources are in South America.

In addition to their water resources, many South American countries also have stronger economies than those in Central America, decent infrastructure, and large talent pools (they have high literacy rates and excellent universities). They also are major food exporters and have established companies in a wide range of industries, including autos, steel, chemicals, electronics, pharmaceuticals, apparel and footwear, and appliances. And last but not least, they are also important sources of commodities such as lithium, copper, iron, silver, zinc, tin, lead, manganese, and bauxite.

Constraining China and Russia

A final reason for the United States and its allies in the Americas to build a strong Pan-American manufacturing ecosystem is to constrain the growing economic, political, and military power of China in particular but also Russia. It’s a goal that President Joseph Biden emphasized in the recent G7 Summit, where he called on the world’s richest democracies to offer developing countries an alternative to China’s Belt and Road initiative, which has made major inroads in Asia, Africa, and the Middle East and has large port and road construction projects in the works in Central American countries.

Russia and China have donated millions of Covid-19 vaccines to countries in South America in a bid to increase influence in these regions and gain preferential mining rights and bids on infrastructure projects. At their summit, the Group of Seven countries pledged to provide one billion doses of Covid-19 vaccines to poor countries over the next year and take other actions to increase supplies.

Modernizing the Pan-American Transportation Network

The existing Pan-American Highway is a 19,000-mile network of roads throughout North, Central and South America. The only major break in it is the Darién Gap, the 100-mile marshy and forested region separating Central and South America. To link major industrial regions across the continents in the near term, the roads would need to be expanded and upgraded, and the Darién Gap would have to be bridged, which new tunneling technologies could help achieve. In the medium to long term, a modern rail transportation network would have to be built. This road and rail network would allow goods to travel seamlessly and swiftly over land across the three Americas without spending weeks on the ocean.

In supply chains, speed translates into cash and flexibility translates into resilience. A regional, “near-shored” supply chain would accelerate movement between industrial hubs across the Americas, substantially reducing transit times from raw material to finished goods to final point of sale by weeks. Less time spent in transit would mean less cash tied up in inventory. Consequently, manufacturers would have reduced working capital requirements and healthier balance sheets.

Making It Happen

Of course, a strategic reset of this magnitude will take time and come with a hefty price tag. The best comparison is the Belt and Road initiative, which China launched in 2013. It is aimed at improving the infrastructure between 70 countries across Asia and Europe and into Africa. The estimated cost of this Chinese-financed mega-project is $8 trillion. The United States is in the best position to lead the Pan-American initiative, but it is highly likely that other countries in the Americas would be willing to help share the costs given the clear economic, political, and social benefits that they would reap. Indeed, the creation of the U.S. Interstate Highway System, which was originally championed by President Eisenhower in the 1950s, provided a huge economic boost and helped turn the United States into a global economic powerhouse.

In addition to public outlays, other means could be used to help finance the construction of the network. They include the cash flow from usage fees and tolls, offtake contracts or preferential-rights agreements that would obligate users of the transportation system to buy goods from a company or country making the initial investment in the network, and privately financed build-operate-transfer (BOT) projects, where a private party helps pay for infrastructure in return for the right to operate and collect fees from it for a set period.

Admittedly, the current security, political, and infrastructural problems plaguing countries in Central and South America pose enormous near-term challenges in building a Pan-American manufacturing ecosystem. However, industries like apparel and food already operate in these countries, and there is a budding medical-devices-manufacturing sector in Costa Rica. Other companies could apply the lessons that players in those industries have learned about how to build and ship from factories in Central and South America.

It would be up to more-developed countries like the United States, Canada, Mexico, and Brazil to persuade other countries to embrace the vision and join this ambitious endeavor. Most countries in the Americas aspire to work closely with the United States. And given the better future that a robust Pan-American manufacturing ecosystem could provide for their populations, many would undoubtedly be willing to support the infrastructure projects with guarantees and exclusive market-entry agreements and rights.

To remain competitive in the global landscape, the United States and other countries in the Americas need to revamp their economic ties. They should set their sights on designing the supply chain for the next 50 years that can bring prosperity to all of them.

SEE ORIGINAL SOURCE HBR.ORG

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GM is now the top auto manufacturer in Mexico

By Nick Bunkley at Automotive News

Mexico in 2018 accounted for more than a quarter of General Motors’ estimated North American production for the first time, a proportion that will rise further if the company follows through with plans to end production at five plants in the U.S. and Canada this year.

GM is now Mexico’s largest auto producer, topping Nissan Motor Co. in a year when it reduced output by an estimated 5 percent in the U.S. and an estimated 33 percent in Canada, according to the Automotive News Data Center. GM built 834,414 vehicles in Mexico last year, an increase of 3.6 percent, vs. a 10 percent decrease to an estimated 763,257 for Nissan, which had been No. 1.

GM’s higher Mexican output at a time when it’s eliminating jobs in the U.S. has angered President Donald Trump and other politicians as well as union officials set to negotiate a new contract with the automaker this fall.

“We want those cars here,” Rep. Debbie Dingell, a Michigan Democrat and former GM lobbyist, said in a statement to Automotive News. “That’s why we have to support a public policy environment that encourages production in the U.S.”

Overall production in Mexico fell by 1 percent in 2018. That’s the first time Mexico production has declined since automakers began opening a flurry of plants south of the U.S. border to take advantage of lower costs from nonunion labor and favorable trade agreements with overseas markets.

But production in Mexico is expected to remain stable in the coming years, particularly now that the U.S., Canada and Mexico have agreed in principle to a renegotiated free-trade agreement, said Eric Anderson, a senior analyst with IHS Markit.

Total North American production declined for a second consecutive year. Production was down an estimated 2.6 percent overall, including an estimated 2 percent in the U.S. and an estimated 8.8 percent in Canada.

Just three automakers built more vehicles in the U.S. in 2018: Tesla, up 151 percent; Volkswagen Group, up an estimated 22 percent; and Honda Motor Co., up 2.7 percent. Ford remained the largest U.S. producer, building nearly 2.4 million vehicles domestically vs. about 2.1 million for GM.

In Mexico, Toyota Motor Corp. built 49 percent more Tacoma pickups in Tijuana, and Hyundai-Kia made 33 percent more small cars in Nuevo Leon. Besides those two and GM, the only other automaker to raise output in Mexico was Fiat Chrysler Automobiles — by 369 vehicles. Honda and Ford joined Nissan with double-digit cutbacks.

A GM spokesman said the company hasn’t added any capacity in Mexico for a decade and has no plans to do so. Its 2018 gain there stemmed from falling demand for GM’s U.S.-made cars and surging popularity of crossovers such as the Mexico-made GMC Terrain and the Chevrolet Equinox, which is built in both Mexico and Canada. Production of the Equinox and Terrain in Mexico nearly doubled from 2017, but GM built 11 percent fewer pickups and 74 percent fewer cars in Mexico last year.Mexico represented an estimated 30.8 percent of GM’s 2018 light-truck production and an estimated 25.7 percent of its total output in North America. Ford got 9.7 percent of its North American supply from Mexico but doesn’t build any pickups, SUVs or crossovers there.

GM is poised for another Mexico production increase in 2019 with the addition of the Chevy Blazer, which started coming off the Equinox line at its Ramos Arizpe plant in November.

The decision to make the Blazer in Mexico — reached, company officials say, when sedan sales were higher and GM had less U.S. capacity to spare — has been a particularly sore spot for the UAW, which learned of it on the day GM reduced its Chevy Cruze plant in Lordstown, Ohio, to one daily shift. GM says it will end production in Lordstown after March 1, followed later in the year by assembly plants in Detroit and Oshawa, Ontario, and propulsion plants in Michigan and Maryland. Unifor, the Canadian union that represents Oshawa workers, last week blocked access to the headquarters of GM Canada in protest of the potential plant closure.

“GM now top producer in Mexico as industry output declines” was originally published at Automotive News on 1/29/19.

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Mexico built 16% more cars in first half of 2017, bucking slowdown in U.S. and Canada

By Pete Evans

After six consecutive months of record output, Mexico now makes more than one out of every five cars built in North America, new numbers from automotive organization Ward’s shows.

Mexico built 1,926,930 cars in the first half of 2017, almost 16 per cent more than the country cranked out in the first six months of last year. That compares with 1,208,911 Canadian-built vehicles over the same period, a figure which dipped by 2.4 per cent from last year’s level.

The boom means Mexico now makes more cars than the U.S. does, as America built 1,697,551 cars in the first half of 2017. Compared to last year, that figure is down by 17 per cent — about what Mexico’s output has expanded by.

Mexico may now be making more cars than America does, but when larger vehicles such as trucks, vans and SUVs are included, America still leads the region in vehicle production, with 5,812,310 through June — although that figure is down almost five per cent in the past year.

Profit margins on those vehicles tend to be higher, which is why North American automakers build them closer to home, while outsourcing smaller vehicles that aren’t selling as well as they used to.

Last month, Ford announced plans to produce all of its Focuses at a new plant in China, the first time the company will build cars in that country that are destined for sale in North America. Previously, the plan was to build the Focus in Mexico, before changing that plan after pressure from the White House.

And General Motors in January announced it would be cutting 625 jobs at one of its Ontario facilities and moving production to Mexico instead.

U.S. President Donald Trump has vowed to energize American manufacturing in his presidency, and the subject of auto jobs is likely to come up in NAFTA discussions between the three nations slated to start later this summer.

While Trump has rallied support for the Made In America movement, the reality of the North American automotive supply chain makes that basically impossible to achieve, since companies build and assemble hundreds of different components in various countries along the way toward building a single vehicle.

Roughly 40 per cent of the components in a vehicle considered to be made in Mexico in fact come from the U.S., the non-partisan think tank the Center for Automotive Research (CAR) said in a report earlier this year. In Canada, the ratio is about 25 per cent.

A hard-line approach requiring that all cars sold in America be fully made and assembled in America would cost the U.S. about 30,000 jobs, and add thousands of dollars to the price of a vehicle, CAR said.

 

Source: http://www.cbc.ca/news/business/automotive-manufacturing-jobs-1.4220397

 

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More U.S. cars are being made in Mexico

The “Made in Mexico” label has become more plentiful on American car lots this year, even as auto makers pressured by President Donald Trump kicked off the year with promises to create more jobs in the U.S.

A move by auto makers to produce some popular sport-utility models in Mexican factories helped spur a 16% increase in production of light vehicles in Mexico during the first six months of the year compared with the same period in 2016. At the same time, tepid sales of sedans held down production in the U.S. and Canada, according to new data posted by WardsAuto.com.

The data indicates one in five cars built in the North American Free Trade Agreement zone comes from Mexico, including hot new products from General Motors Co. and Fiat Chrysler Automobiles NV. That is up from the industry’s reliance on Mexico during the financial crisis, when the U.S. car business received billions of dollars in bailouts aimed at preserving jobs and keeping domestic players afloat.

Mr. Trump launched several attacks on Mexican car imports throughout his campaign and after his election, saying more auto-factory jobs should remain in the U.S. Since then, auto makers have committed to several initiatives, including a move by Ford Motor Co. to scrap a new assembly plant being built in Mexico and invest some of the money saved in a Michigan factory that will add jobs. GM and Fiat Chrysler have said they intend to invest billions of dollars to add jobs in factories in coming years, citing favorable policies related to tax reform and other issues as reason for optimism.

The Trump administration in August will kick off new talks with Canada and Mexico on an overhaul to Nafta. The vehicle-manufacturing business — including a sprawling supply base — is a central negotiation point.

The latest data from WardsAuto shows that U.S. light-vehicle manufacturing fell 5% during the first six months of this year from a year earlier, as auto makers shed workers or scheduled significant downtime to counter a slowdown in demand for sedans. A substantial chunk of America’s automotive manufacturing footprint is devoted to production of family cars or compact cars, which aren’t faring well as gasoline prices remain low and sport-utility vehicles grow in popularity.

Separate U.S. trade data shows that the value of light-vehicle imports from Mexico to the U.S. ballooned 40% through May.

United Auto Workers President Dennis Williams told reporters last week that the union is planning to launch a “Made in America” campaign later this year, an effort to support hundreds of thousands of members building vehicles or parts in U.S. factories. Mr. Williams is looking to follow the Trump administration’s focus on American-made products and will use the effort to educate consumers on how to know if a car is built in America.

Finding those cars is getting harder.

Pickups such as some versions of FCA’s Ram and Chevrolet Silverado, two of the best-selling vehicles in America, are built in Mexico.

GM and Chrysler this year also started producing small crossover SUVs in Mexican plants; these are considered important vehicles for U.S. dealerships because of their growing popularity as consumers shift away from passenger cars.

GM shifted some production of a revamped version of its popular Chevrolet Equinox crossover SUV to Mexico from plants in U.S. and Canada. Over the next few years, the largest U.S. auto maker is expected to add other new models to factories south of the border.

Most of Fiat Chrysler’s increase comes from a decision to shift North American manufacturing of the Jeep Compass from the U.S. to Mexico. An all-new version of that small SUV is being built at FCA’s plant in Toluca, Mexico, which has seen year-to-date production increase 177%, according to WardsAuto.

Meanwhile output at FCA’s factory in Belvidere, Illinois is down nearly 93% year to date, as production of the older Compass model has ended and two new models of the Jeep Patriot and Dodge Dart were canceled. That plant has been retooled for production of a new Jeep Cherokee midsize SUV, which just began in June after being shifted from a Toledo facility.

 

Source: http://www.foxbusiness.com/markets/2017/07/25/more-u-s-cars-are-being-made-in-mexico.html

 

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Ford to Build a New Plant in Mexico
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Ford to Build a New Plant in Mexico

  • Ford is investing in a new plant in Mexico’s San Luis Potosi State to produce more small cars
  • The $1.6 billion USD investment will create 2,800 additional direct jobs by 2020
  • Construction begins this summer, with new small cars expected to start rolling off the line in 2018

MEXICO CITY, April 5, 2016 – Further increasing its competitiveness, Ford is investing in a new small car plant in Mexico, building a new manufacturing site in San Luis Potosi State.

Ford is investing $1.6 billion USD in the facility, which begins construction this summer. The new plant will create 2,800 additional direct jobs by 2020.

Specific vehicles being produced at the new facility will be announced later.

This investment comes during Ford’s 91st year in Mexico, including manufacturing vehicles since 1925. Ford and its 116 dealers this year also are celebrating 50 years of strong educational programs, including the construction and maintenance of nearly 200 rural schools throughout the country.

Mexico is Ford’s fourth largest vehicle manufacturing site for global customers – behind the U.S., China and Germany. Vehicles produced in Mexico also serve customers in the U.S., Canada, China, Argentina, Bolivia, Brazil, Colombia, Chile, Paraguay, Peru, Uruguay and South Korea.

The investment is part of the company’s One Ford global product and manufacturing plan. During the past five years, Ford has invested more than $10.2 billion in Ford facilities alone in the U.S. In addition, Ford has invested $2.7 billion in facilities and supplier tooling in Spain, $2.4 billion in Germany and – with the company’s partners – $4.8 billion in China.All of these investments are part of the company’s plan to serve global markets and deliver profitable growth.

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