Canadian Pacific Railway Limited (CP) and Kansas City Southern (KCS) announced March 21 that they have 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 $29 billion, which includes the assumption of $3.8 billion of outstanding KCS debt. The transaction, which has the unanimous support of both boards of directors, values KCS at $275 per share, representing a 23% premium, based on the CP and KCS closing prices on March 19, 2021, based on the respective CP and KCS 30-day volume weighted average prices.
Following the closing into a voting trust, common shareholders of KCS will receive 0.489 of a CP share and $90 in cash for each KCS common share held.
Following final approval from the Surface Transportation Board (STB), the transaction will combine the two railroads to create the first rail network connecting the U.S., Mexico, and Canada. Joining seamlessly in Kansas City, Mo., in America’s heartland, CP and KCS together will connect customers via single-network transportation offerings between points on CP’s system throughout Canada, the U.S. Midwest, and the U.S. Northeast and points on KCS’ system throughout Mexico and the South Central U.S.
The combined network’s new single-line offerings will deliver dramatically expanded market reach for customers served by CP and KCS, provide new competitive transportation service options, and support North American economic growth. The transaction is also expected to create jobs across the combined network. Additionally, efficiency and service improvements are expected to achieve meaningful environmental benefits.
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.
“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. “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.”
Mike Steenhoek, executive director of Soy Transportation Coalition, reached out to a number of prominent agricultural rail shippers to solicit their initial perspective on the newly proposed merger. At this moment, he said it is too early to make a definitive conclusion on whether the merger, if approved, will primarily benefit shareholders, customers, or both.
“Whenever a merger or acquisition among large providers of a particular service occurs – including within the railroad industry – it is healthy to have some degree of concern given how mergers and acquisitions in the past have indeed resulted in a reduction of rail service access or increased rates among agricultural shippers,” he noted.
Additionally, merger or acquisition can be a catalyst for additional mergers and acquisitions. Steenhoek said it is unknown whether this merger, if approved, will result in increased energy for further consolidation among Class I railroads.
Two other concerns that usually emerge following a merger or acquisition are whether there is any overlap as well as what the market share will be once the transaction closes. Steenhoek said the two railroads currently have very little service overlap, which provides some degree of encouragement among customers. Additionally, if approved, the new Canadian Pacific/Kansas City Southern railroad would still rank as the smallest Class I railroad in terms of operating revenue.
Further, the proposed merger could also result in greater access to new markets in the southern U.S. and Mexico, explained Steenhoek.
“Many of these current Canadian Pacific customers currently only have access to export terminals in the Pacific Northwest. Similarly, current Kansas City Southern customers may enjoy new access to markets served by the Canadian Pacific network…The proposed Canadian Pacific/Kansas City Southern merger will provide access to a similar geographical reach with the additional access into Mexico.”