The companies said Sunday that their boards agreed to a deal that values Kansas City at $ 275 a 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 common share in Kansas City held.
If approved by regulators, the agreement would unite two of North America’s major freight carriers, linking factories and ports in Mexico, farms and plants in ocean ports and energy resources in the southwestern United States and Canada.
The transaction will need the approval of the U.S. Surface Transportation Committee, which requires major railroad combinations to demonstrate that it operates in the public interest, increasing competition. The merger partners said they expect the STB review to be completed by mid-2022.
The combined company, which will be renamed Canadian Pacific Kansas City, will have annual revenues of approximately $ 8.7 billion and would employ nearly 20,000 people. It would be led by Keith Creel, Canadian CEO of Pacific. Investors in Kansas City would own approximately 25% of the combined entity’s shares.
Kansas City Southern is the smallest of the five major railroads in the United States, but plays a key role in US-Mexico trade. Its network extends mainly from Mexico through Texas to its city of the same name. The company last year rejected bids worth about $ 20 billion from a group of institutional investors who wanted to make them private, The Wall Street Journal reported.
Canadian Pacific has long sought a union with Kansas City to expand its reach on its crowded freight routes from Mexico through the southern and midwestern states. CP’s major railroads run through Canada, some northern states and the south to Chicago.
The leader of the Canadian railroad, Mr. Creel, worked closely with former chief Hunter Harrison, who made a series of unsuccessful overtures to buy Kansas City. Mr. Harrison died in 2017 after taking over and overhauling another US operator, CSX Corp.
“This will create the first US-Mexico-Canada railway,” Creel said in a statement.
Rail mergers face significant regulatory hurdles in the US Under Mr Harrison, Canadian Pacific abandoned $ 30 billion pursuit of Norfolk Southern Body.
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in 2016, after STB expressed concern about reduced competition and potential safety issues.
Kansas City and Canadian Pacific currently have a single point where their two networks connect in a Kansas City, Mo. facility that operates together. The merger could allow trains traveling north and south to avoid exchanging cars and bypassing Chicago, a busy and often congested hub in the US freight system.
The merger partners stated that the proposed combination would not reduce the choice for customers, as there is no overlap between their systems. They said the possibility of single-line routes would change trucks on US highways, reducing congestion and emissions on the Dallas-Chicago corridor.
The freight rail industry suffered a sharp drop in volume last year as the pandemic slowed trade and temporarily shut down many US stores, but the volume returned as factories continued to operate and their economies recovered. The volume of trade overwhelmed some US ports, causing congestion and delays.
The companies presented a two-step process for the transaction. Canadian Pacific will set up a trust to buy 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 continue to be led by the board of directors and management of Kansas City until the STB review is completed.
The global headquarters of the combined company would be in Calgary. The US headquarters will be in Kansas City, Mo, while Mexico’s headquarters will remain in Mexico City and Monterrey.
To finance the transaction, Canadian Pacific said it would issue 44.5 million new shares and raise debt of about $ 8.6 billion. Canadian Pacific will also take on about $ 3.8 billion of Kansas City debt. The company expects to have outstanding debts of about $ 20.2 billion at the conclusion of the transaction.
The merger partners said the proposed deal is expected to generate annual savings of about $ 780 million over three years, in part from improving performance on time and delivering a more efficient service. Canadian Pacific expects the deal to add to its gains in the first full year after it takes control of Kansas City.
Write to Jacquie McNish to [email protected]
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