Canadian Pacific to acquire Kansas City Southern

Editor's note: This story has been updated.

Canadian Pacific Railway Ltd. and Kansas City Southern announced yesterday they've entered into a merger agreement, under which CP has agreed to acquire KCS stock in a cash transaction worth $29 billion, which includes the assumption of about $3.8 billion of outstanding KCS debt. 

The transaction, which has the unanimous support from both Class Is' boards, values KCS at $275 per share, representing a 23% premium, based on the companies' closing prices on March 19. Following the closing into a voting trust, common shareholders of KCS will receive 0.489 of a CP share and $90 in cash for each KCS common share held, according to a press release.

After Surface Transportation Board (STB) approval, CP will acquire control of KCS and current CP President and Chief Executive Officer Keith Creel will serve as the CEO of the combined company, which will be called Canadian Pacific Kansas City (CPKC).

Calgary will be the global headquarters and Kansas City, Missouri, will be designated as the U.S. headquarters.

CP's proposed acquisition of KCS is the largest industry deal in decades, and would create a "compelling U.S.-Mexico-Canada rail network," according to a Baird Equity Research report.

"The proposed combination would create the first U.S.-Mexico-Canada rail network connecting ports on the U.S. Gulf, Atlantic and Pacific coasts and offering single-line hauls across the continent," Baird analysts wrote.

KCS has long been viewed as a takeover target given its smaller-relative size and exemption from the STB's 2001 rules governing mergers and acquisitions involving Class Is, the Baird report notes. In September 2020, media reports indicated that KCS rejected a takeover bid from private equity buyers.

"Given the limited franchise overlap (Kansas City, Missouri, is the single point of connection) and current interpretation of the STB's governing rules, we think deal approval is more likely than not," the Baird report states.

While remaining the smallest of six U.S. Class Is by revenue, the combined company will be a much larger and more competitive network, operating 20,000 miles of rail, employing close to 20,000 people and generating total revenue of $8.7 billion based on 2020 actual revenue, according to CP and KCS officials.

"This transaction will be transformative for North America, providing significant positive impacts for our respective employees, customers, communities and shareholders," said Creel. "This will create the first U.S.-Mexico-Canada railroad, bringing together two railroads that have been keenly focused on providing quality service to their customers to unlock the full potential of their networks. CP and KCS have been the two best-performing Class I railroads for the past three years on a revenue growth basis."

Moreover, the competition the combined entity will bring to the North American transportation market "cannot happen fast enough, as the new U.S.-Mexico-Canada Trade Agreement among these three countries makes the efficient integration of the continent's supply chains more important than ever before," Creel said.

The combination will provide a competitive alternative to existing rail-service providers and is expected to result in improved service to customers, CP and KCS officials said. Grain, automotive, auto-parts, energy, intermodal and other shippers will benefit from the increased efficiency and simplicity of the combined network, which is expected to spur greater rail-to-rail competition and support customers in growing their rail volumes, they said.

Creel and KCS President and CEO Patrick Ottensmeyer said the combination of two Class Is also recognizes the "important role that rail plays in lowering overall transportation emissions."

"This combination advances our shared science-based pledges in line with the Paris Agreement to improve fuel efficiency and lower emissions in support of a more sustainable North American supply chain," they added.