Kansas City So. Merges with Canadian Pacific Creating First U.S.-Mexico-Canada Rail Network

Source: Streetwise Reports   03/22/2021

Shares of Kansas City Southern traded 12% higher after the company reported it agreed to be acquired by Canadian Pacific Railways in a stock and cash transaction valued at US$29 billion.

Kansas City Southern (KSU:NYSE) (KCS) and Canadian Pacific Railway Limited (CP:NYSE; CP:TSX) (CP) yesterday announced that they “entered into a merger agreement, under which CP has agreed to acquire KCS in a stock and cash transaction representing an enterprise value of approximately US$29 billion, which includes the assumption of $3.8 billion of outstanding KCS debt.”

The reported indicated that each of the companies respective boards of directors have unanimously voted in support of the transaction. Canadian Pacific Railway’s offer price for Kansas City Southern common shares is $275 per share, which the firms advised represents a 23% premium, based upon the closing share prices of CP and KCS shares on Friday, March 19, 2021. Under the terms of the purchase agreement, shares will be folded into a voting trust whereby for each share owned, KCS common shareholders will receive $90 in cash and 0.489 CP shares.

When completed, the transaction will create the first rail network connecting Canada Mexico and the U.S. The seamless single-network will be joined in Kansas City, Mo., to connect customers throughout CP’s existing transportation system with the U.S. Midwest and Northeast and points across KCS’ system in the South Central U.S. and Mexico.

“While remaining the smallest of six U.S. Class 1 railroads by revenue, the combined company will be a much larger and more competitive network, operating approximately 20,000 miles of rail, employing close to 20,000 people and generating total revenues of approximately $8.7 billion based on 2020 actual revenues,” the release stated.

Canadian Pacific’s President and CEO Keith Creel commented, “This transaction will be transformative for North America, providing significant positive impacts for our respective employees, customers, communities, and shareholders…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 1 railroads for the past three years on a revenue growth basis..The new competition we will inject into the North American transportation market cannot happen soon enough, as the new USMCA Trade Agreement among these three countries makes the efficient integration of the continent’s supply chains more important than ever before.”

Kansas City Southern’s President and CEO Patrick J. Ottensmeyer remarked, “In combining with CP, customers will have access to new, single-line transportation services that will provide them with the best value for their transportation dollar and a strong competitive alternative to the larger Class 1s. Our companies’ cultures are aligned and rooted in the highest safety, service and performance standards…Importantly, KCS employees will benefit from being part of a truly North American continental enterprise, which creates a strong platform for revenue growth, capital investment, and future job creation. Customers, labor partners, and shareholders will all benefit from the inherent strengths of this combination, including attractive synergies and complementary routes.”

The companies claimed that the combined business will enhance competitiveness and will result in improved service to customers of every size. The firm’s added that “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.” When the transaction, which is subject to various regulatory approvals is completed, the new merged company will operate a single integrated rail system linking major U.S. Gulf, Atlantic and Pacific coast ports with key overseas markets.

The firm claims that the combined enterprise will aid in reducing commercial truck traffic on U.S. highways as rail shipping is four times more fuel efficient than trucking and produces 75% fewer greenhouse gas emissions. CP noted that it is also very committed to sustainability and presently developing the first line-haul hydrogen-powered locomotive in North America.

The companies noted that CP’s acquisition of control of KCS’ U.S. railways remains subject to approval from the U.S. Surface Transportation Board (STB). The firms stated that upon closing, KCS common shareholders will own 25% CP’s outstanding common shares. CP indicated that in order to fund the stock consideration portion of the merger, its will issue 44.5 million new shares. CP said that the cash portion will be funded from a combination of cash-on-hand on its balance sheet and around $8.6 billion in new debt financing for which it has already secured commitments.

The transaction is a two step process that first requires KCS shareholder approval, which is expected to be accomplished in the second half of this year. The second phase involves gaining approvals from the STB and other regulatory authorities, which is expected to be completed in mid-2022.

The companies advised that when the transaction is finalized, CP’s current CEO Creel will serve as the CEO of the combined company that will be renamed Canadian Pacific Kansas City (CPKC). The company stated that its global headquarters will be based in Calgary with Kansas City being designated as the location for its U.S. headquarters and that the Mexico headquarters are to remain in Mexico City and Monterrey. The report indicated that CPKC will welcome four directors from KCS to join CP’s expanded Board of Directors.

Canadian Pacific is a transcontinental railway based in Calgary, Alberta. The firm’s rail lines cross the U.S. and Canada providing direct links to major West and East Coast port facilities. The firm offers freight transportation services, logistics solutions and supply chain expertise and connects its North American customers to key markets globally.

Kansas City Southern is a transportation holding company headquartered in Kansas City, Mo., that owned railroad investments in the U.S., Mexico and Panama. The firm’s primary and largest asset is the Kansas City Southern Railway Company, which provides rail services to the central and south central U.S. The company’s Kansas City Southern de Mexico, S.A. de C.V. operates in northeastern and central Mexico and offers connections to the port cities of Lázaro Cárdenas, Tampico and Veracruz. The company of also owns a 50% interest in Panama Canal Railway Company, which provides passenger and freight service across the Isthmus of Panama along the Panama Canal.

Kansas City Southern started the day with a market capitalization of around $20.4 billion with approximately 90.85 million shares outstanding and a short interest of about 1.1%. KSU shares opened 15.6% higher today at $259.17 (+$35.01, +12.87%) over Friday’s $224.16 closing price and reached a new 52-week high price this morning of $260.29. The stock has traded today between $249.65 and $260.29 per share and is currently trading at $251.71 (+$27.55, +12.29%).

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