CANADIAN Pacific Railway (C) and Kansas City Southern (KCS) have finally entered into a merger agreement, whereby CP will acquire KCS for approximately $US 31bn including the assumption of $US 3.8bn of outstanding KCS debt.
The deal has the unanimous support of both boards of directors and values KCS at $US 300 per share, representing a 34% premium.
“Our path to this historic agreement only reinforces our conviction in this once-in-a-lifetime partnership,” says Mr Keith Creel, CP’s president and CEO. “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 US-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,” says Mr Patrick Ottensmeyer, president and CEO of KCS.
CP and KCS first agreed to merge in March, but in April Canadian National (CN) submitted a counter-offer representing a 21% premium over CP’s $US 29bn offer and valuing KCS at $US 33.6bn.
In May, KCS notified CP of its intention to terminate its merger agreement with CP and on May 21 KCS accepted CN’s offer. CP submitted a revised offer in August. On August 31 the US Surface Transportation Board (STB) announced its unanimous decision to reject the use of a voting trust agreement in connection with the planned merger between CN and KCS, stating that using a trust is not consistent with the public interest under STB merger regulations. The STB ruling paved the way for CP and KCS to reopen negotiations.
The merged railway will remain the smallest of the six US Class 1 railways by revenue. However, the combined railways will operate a network of around 32,200km, employing close to 20,000 people, and generating total revenues of approximately $US 8.7bn based on actual 2020 revenues. The two railways say the merger will create jobs, improve efficiency and introduce service improvements with “meaningful environmental benefits.”
CP’s acquisition of KCS is subject to STB approval. The STB review of CP’s proposed control of KCS is expected to be completed in the second half of 2022. If approved, integration of the two railways will take place over the following three years. Creel will become CEO of the combined company, Canadian Pacific Kansas City (CPKC).
CP’s headquarters in Calgary, Canada, will become the global headquarters of CPKC, and Kansas City, Missouri, will be its US headquarters. KCS’ Mexico headquarters will remain in Mexico City and Monterrey. CP’s current US headquarters in Minneapolis-St. Paul will remain an important operating base.