Canadian Pacific Railway to buy Kansas City Southern for $ 25 billion

Canadian Pacific Railway said on Sunday that it had agreed to buy Kansas City Southern for $ 25 billion in cash and shares to create the first rail network linking the United States, Mexico and Canada, betting on a pickup truck in North America.

Kansas City Southern shareholders will receive 0.489 of a Canadian Pacific share and $ 90 in cash for each KCS common share held, the companies said in a joint statement. The deal, which has a corporate value of $ 29 billion including debt, values ​​Kansas City Southern at $ 275 per share, representing a 23% premium to Friday’s closing price of $ 224.16.

The transaction is the largest M&A launched in 2021.

“The new competition that we will inject into the North American transportation market cannot happen any soon, as the new USMCA Trade Agreement between these three countries makes the efficient integration of the continent’s supply chains more important than ever,” said Keith Creel , Chief Executive of Pacific said in the statement. “This will create the first US-Mexico-Canada railroad.”

The new and modernized US-Mexico-Canada trade pact came into force in July last year, replacing the previous agreement, which lasted 26 years, and is expected to further stimulate commercial manufacturing and agriculture activities between the three countries.

The Kansas City Southern board approved the offer and the two companies notified the US Surface Transportation Board to seek the agency’s necessary approval. Attempts by Canadian railroad operators to buy railroad companies from the United States have met with limited success due to antitrust concerns.

Creel will continue to serve as CEO of the combined company, which will be based in Calgary, the statement said.

The deal comes amid expectations of a recovery in U.S.-Mexico trade after Joe Biden replaced Donald Trump as U.S. president.

The companies also highlighted the environmental benefits of the deal, saying that the new single-line routes that would be created by the combination should take trucks off the crowded US roads and reduce emissions.

Trains are four times more fuel efficient than trucks, and a train can keep more than 300 trucks off public roads and produce 75% less greenhouse gas emissions, the companies said in a joint statement.

Kansas City Southern shareholders are expected to own 25% of Canadian Pacific’s outstanding common shares after the deal, the companies said.

Canadian Pacific said it would issue 44.5 million new shares and raise about $ 8.6 billion in debt to finance the transaction.

The Financial Times reported for the first time on the deal.

Canadian Pacific, based in Calgary, is Canada’s second rail operator, behind Canadian National Railway Co Ltd, with a market cap of $ 50.6 billion.

It owns and operates a transcontinental freight railroad in Canada and the United States. Grain transport is the company’s biggest revenue driver, accounting for about 58% of bulk revenue and about 24% of total freight revenue in 2020.

Kansas City Southern has domestic and international rail operations in North America, focusing on the north-south freight corridor that connects the commercial and industrial markets of the central United States with the industrial cities of Mexico.

Canadian Pacific’s last attempt to expand its business in the United States comes after declining a hostile $ 28.4 billion offer by Norfolk Southern Corp in April 2016. Canadian Pacific’s merger negotiations with CSX Corp, which owns a large network in the eastern United States, failed in 2014.

An offer by the Canadian National Railway Co, the country’s largest railway, to buy Burlington Northern Santa Fe, owned by Warren Buffett, was blocked by U.S. antitrust authorities in 1999-2000.

BMO Capital Markets and Goldman Sachs & Co. LLC are serving as financial advisors to Canadian Pacific, while BofA Securities and Morgan Stanley & Co. LLC are serving as financial advisors to Kansas City Southern.