Railroads Achieve $ 25 Billion Merger

The companies said Sunday that their boards agreed to a deal that values ​​Kansas City at $ 275 per share in a combination of cash and shares. Kansas City investors will receive 0.489 of a Canadian Pacific share and $ 90 in cash for each Kansas City common share they own.

If approved by regulators, the deal would unite two of North America’s top freight carriers, linking factories and ports in Mexico, farms and plants in the US Midwest, and Canada’s ocean ports and energy resources.

The transaction will need approval from the US Surface Transportation Board, which requires major rail combinations to demonstrate that they are operating in the public interest by enhancing competition. The merger partners said they expect the STB review to be completed by mid-2022.

The combined company, to be renamed Canadian Pacific Kansas City, would have annual revenues of approximately $ 8.7 billion and would employ nearly 20,000 people. It would be led by Canadian Pacific CEO Keith Creel. Kansas City investors would own approximately 25% of the shares in the combined entity.

Kansas City Southern is the smallest of the top five freight railroads in the United States, but it plays a key role in trade between the United States and Mexico. Its network extends mainly throughout Mexico through Texas to its namesake city. Last year, the company rejected takeover offers worth about $ 20 billion from a group of institutional investors seeking to privatize it, The Wall Street Journal reported.

Canadian Pacific has long sought a union with Kansas City to extend its reach to its busy freight routes stretching from Mexico through the southern and midwestern states of the US. CP’s main rail lines run through Canada , some states in the northern US and as far south as Chicago.

The leader of the Canadian Railroad, Mr. Creel, worked closely with former Chief Hunter Harrison, who made a series of unsuccessful attempts to buy Kansas City. Harrison died in 2017 after taking over and renewing another US operator, CSX Corp.

“This will create the first railroad between the United States, Mexico and Canada,” Creel said in a statement.

Railroad mergers face significant regulatory hurdles in the U.S. Under Harrison, Canadian Pacific abandoned a $ 30 billion pursuit of Norfolk Southern Corp.

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in 2016 after the STB raised concerns about reduced competition and potential security issues.

Kansas City and Canadian Pacific currently have a single point where their two networks connect, at a facility in Kansas City, Missouri, that they operate together. The merger could allow trains traveling north and south to avoid having to swap cars and potentially bypass Chicago, a busy and often congested hub on the US freight system.

The merger partners said the proposed combination would not reduce options for clients as there is no overlap between their systems. They said the possibility of single-line routes would push trucks off American highways, reducing congestion and emissions in the Dallas-Chicago corridor.

The rail freight industry suffered a sharp drop in volume last year as the pandemic slowed trade and temporarily closed many stores in the United States, but volume recovered as factories continued to operate and economies recovered. Trade volume has overwhelmed some US ports, causing congestion and delays.

The companies outlined a two-step process for the deal. Canadian Pacific will create a trust to acquire Kansas City shares later this year, if shareholders bless the deal. The trust will pay the Kansas City shareholders and the Kansas City board and management will continue to manage the company until the STB review is completed.

The combined company’s global headquarters would be in Calgary. The United States headquarters will be in Kansas City, Missouri, while the Mexico headquarters will remain in Mexico City and Monterrey.

To fund the transaction, Canadian Pacific said it would issue 44.5 million new shares and raise about $ 8.6 billion in debt. Canadian Pacific will also assume about $ 3.8 billion of Kansas City’s debt. The company expects to have about $ 20.2 billion in outstanding debt when the deal closes.

The merger partners said they expect the proposed deal to generate annual savings of about $ 780 million over three years, in part due to improved on-time performance and more efficient service delivery. Canadian Pacific expects the deal to increase its earnings in the first full year after it takes control of Kansas City.

Write to Jacquie McNish at [email protected]

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