Canadian Pacific and Kansas City Southern on Sunday announced plans to close a $ 29 billion deal to create the first rail network between the United States, Mexico and Canada.
It is an attempt to capitalize on the flows of trade that are expected to flow through the three countries after President Donald J. Trump signed the agreement between the United States, Mexico and Canada last year. It is also a bet on the strength of the industrial economy once the United States recovers from the pandemic.
The Canadian Pacific connects major ports on the east and west coasts between the United States and Canada, while Kansas City Southern connects the United States, Mexico, and Panama. The two connect at a single point: a shared facility in Kansas City, Missouri, where Kansas City Southern is located.
“There are just so many long-term strategic benefits to this deal,” said Patrick J. Ottensmeyer, CEO of Kansas City Southern, in an interview. “Our board of directors really saw the value in bringing these two companies together now.”
The combined company, Canadian Pacific Kansas City, will have its global headquarters in Calgary, Alberta, while Kansas City will serve as the US headquarters. It will operate around 32,000 km of rail and generate sales of around $ 8.7 billion. Keith Creel, CEO of Canadian Pacific, will oversee the new company.
The deal values Kansas City Southern at $ 275 per share, a 23 percent premium over Friday’s closing price. Investors will receive 0.489 Canadian Pacific shares and $ 90 cash for each common share of Kansas City.
Updated
March 21, 2021, 3:14 p.m. ET
This is also a significant increase over the reported $ 208 share offering by Blackstone Group, a private equity firm, which Kansas City Southern rejected last year. Kansas City stocks are up 12 percent since the start of the year, while Canadian Pacific stocks are up nearly 10 percent.
The boards of directors of both companies have unanimously approved the cash-and-stock deal, which is expected to be completed in mid-2022, subject to customary approvals.
The railway industry can be seen as a sign of industrial activity. It is expected to benefit from a growing US economy as it emerges from the pandemic. The Federal Reserve has signaled optimism about the nation’s economic outlook, and President Biden signed a bill this month on spending $ 1.9 trillion.
Investors in Canadian Pacific and Kansas City Southern are not alone in their optimism about the industry’s outlook. Warren Buffett, whose Berkshire Hathaway owns the BNSF Railway, recently commended the value he saw in the U.S. rail industry in his annual letter.
The railroad executives on Sunday highlighted other opportunities they see in the deal. Mr. Creel described the merger as a “compelling opportunity to get trucks off the road” at a time when the United States is focused on transitioning to a greener economy. It also reduces risks in the global supply chain after a pandemic that highlighted its weaknesses, Ottensmeyer said.
The transaction must be approved by the Surface Transportation Board, a division of the Department of Transportation, which previously acknowledged concerns about the railroad’s consolidation into service issues for shippers. The Canadian Pacific’s previous efforts to acquire US railways have failed, in part because of such concerns. That includes talks with CSX Corporation in 2014 and Norfolk Southern in 2016. And the Biden government has already signaled a tougher stance on antitrust scrutiny.
Because of its size, Kansas City Southern is exempt from the 2001 guidelines aimed at tightening control over business in the industry. The combined company would still be the smallest of the remaining six largest rail freight companies in the United States. The two railways have no overlap, said Mr Creel and Mr Ottensmeyer – and in some cases the transaction will create new markets.
“There are no other deals that represent the uniqueness of this deal,” said Creel.
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