CP enters deal to form new rail company

Pending TSB approval and support from shareholders, CP officials said they expect the deal to be finalized in mid-2022. | File photo

Canadian Pacific Railway could soon become part of a new and expanded North American railway operation known as CPKC.

CP officials announced March 21 that the 140-year-old company based in Calgary, has entered into a merger agreement that would see CP acquire all outstanding shares of American-based railway company Kansas City Southern for about US$29 billion.

In a March 21 news release, CP said the agreement would see CP acquire all of Kansas City Southern’s common and preferred shares as well as $3.8 billion of outstanding KSC debt.

The deal values KCS stock at $275 per share, which represents a 23 percent premium over KCS closing prices on March 19.

The transaction, subject to approval by the U.S. Surface Transportation Board, would combine CP and KCS to create CPKS, the first North American railway network connecting Canada, the United States and Mexico.

The merger would add 12 port locations to CP’s existing network, including eight U.S. port facilities in the Gulf Coast states of Alabama, Mississippi, Louisiana and Texas, and four others in Mexico, including one Pacific Ocean port at Lazaro Cardenas, west of Mexico City.

Pending TSB approval and support from KCS shareholders, CP officials said they expect the deal to be finalized in mid-2022.

The combined company would remain the smallest of six Class 1 American railways based on 2020 revenues of about $8.7 billion but would operate a large network that would deliver expanded market reach for customers currently served by CP and KCS.

The merged operations would operate about 32,000 kilometres of rail in Canada, the U.S. and Mexico, and would have access to 22 port facilities, including two on the Pacific Coast, three on the Great Lakes and 17 on the eastern seaboard of North America.

The combined company would employ close to 20,000 people.

No regulatory approvals would be required in Canada, the company said.

“This transaction will be transformative for North America, providing significant positive impacts for our respective employees, customers, communities, and shareholders,” said CP president and chief executive officer Keith Creel in a March 21 conference call with investors.

“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.”

He said if the merger is approved, the company will be named CPKC and global headquarters will be located in Calgary, with U.S. headquarters located in Kansas City, Missouri.

The merged company will create a railway with an “unmatched and unparalleled North American footprint,” added Patrick Ottensmeyer, president and chief executive officer of KCS.

“We do not compete head to head in any market,” Ottensmeyer said. “We share a (yard) in Kansas City …. CP goes north and we go south, so this is entirely complementary.”

Creel said efficient integration of the continent’s supply chains is more important than ever, given the recent signing of the CUSMA trade agreement.

“Over the coming months, we look forward to speaking with customers of all sizes, and communities across the combined network, to outline the compelling case for this combination,” he said.

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, he added. 

Under the merger agreement, common shareholders of KCS will receive 0.489 of a CP share and $90 in cash for each KCS common share held, while preferred shareholders will receive $37.50 in cash for each KCS preferred share held.

If the deal is executed, KCS common shareholders are expected to own about 25 percent of CP’s outstanding common shares.

To facilitate the deal, CP will issue 44.5 million new shares. The cash portion of the deal will be funded through a combination of cash-on-hand and raising about $8.6 billion in debt.

CP’s outstanding debt would increase to an estimated $20.2 billion. 

Prior to approval from the U.S. Transportation Safety Board, the deal will require the support of KCS shareholders, which is expected in the second half of 2021.

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