The companies said on Sunday that their boards have agreed to a deal that values Kansas City at $ 275 per share in a combination of cash and stock. Kansas City investors will receive 0.489 of a Canadian Pacific share and $ 90 in cash for each Kansas City common stock.
If approved by regulatory agencies, the deal would unite two of the major North American freight carriers, link factories and ports in Mexico, farms and factories in the Midwestern US, and the ocean ports and energy resources of Canada.
The transaction requires the approval of the US Surface Transportation Board, which requires major railroads 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, rebranded as Canadian Pacific Kansas City, is said to have annual sales of approximately $ 8.7 billion and employ nearly 20,000 people. It would be headed by Keith Creel, CEO of the Canadian Pacific. Kansas City investors would own approximately 25% of the shares of the combined entity.
Kansas City Southern is the smallest of the five major freight railways in the US, but it plays a key role in US-Mexico trade. The network mainly runs the length of Mexico via Texas to the city of the same name. The company rejected takeover offers worth about $ 20 billion from a group of institutional investors who wanted to take it private last year, The Wall Street Journal reported.
Canadian Pacific has long been committed to a commitment with Kansas City to extend its reach to its busy freight routes that stretch from Mexico through southern and mid-western US states. CP’s major rail lines run through Canada, some of the northern states of the US, and south to Chicago.
The leader of the Canadian railroad, Mr. Creel, worked closely with former chief Hunter Harrison, who made a number of unsuccessful advances to buy Kansas City. Mr. Harrison died in 2017 after acquiring and renewing another US operator, CSX Corp.
“This will create the first rail line between the US, Mexico and Canada,” Mr Creel said in a statement.
Rail mergers face significant regulatory hurdles in the US Under Mr. Harrison, Canadian Pacific has given up a $ 30 billion chase to Norfolk Southern. Corp.
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in 2016 after the STB raised concerns about reduced competition and potential safety concerns.
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 jointly. The merger will allow trains to travel north and south to avoid having to switch cars and potentially bypass Chicago, a busy and often congested hub in the U.S. freight system.
The merging partners said the proposed combination would not reduce choice for customers as there is no overlap between their systems. They said the single-line route capability would move trucks off the U.S. highways, reducing congestion and emissions in the Dallas-to-Chicago corridor.
The freight rail industry suffered a sharp decline in volume last year as the pandemic slowed trade and temporarily closed many US stores, but volume rebounded as factories continued to run 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 shares in Kansas City later this year, if shareholders bless the deal. Kansas City shareholders will be paid by the trust and the company will be led by Kansas City council and management until the STB assessment is completed.
The combined company’s global headquarters would be located in Calgary. The US headquarters will be in Kansas City, Missouri, while Mexico’s 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 approximately $ 8.6 billion in debt. Canadian Pacific will also take over about $ 3.8 billion of Kansas City’s debt. The company expects to have approximately $ 20.2 billion in debt outstanding when the deal closes.
The merger partners said they expect the proposed deal to generate annual savings of approximately $ 780 million over three years, in part by improving on-time performance and running a more efficient service. Canadian Pacific expects the deal to contribute to earnings in the first full year after taking control of Kansas City.
Write to Jacquie McNish at [email protected]
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