Railroads Strike a $25 Billion Merger -- 2nd Update
March 21 2021 - 10:30AM
Dow Jones News
By Jacquie McNish
Canadian Pacific Railway Ltd. agreed to acquire Kansas City
Southern in a merger valued at about $25 billion that would create
the first freight-rail network linking Mexico, the U.S. and
Canada.
The companies said Sunday their boards agreed to a deal that
values Kansas City at $275 a share in a combination of cash and
stock. Kansas City investors will receive 0.489 of a Canadian
Pacific share and $90 in cash for each Kansas City common share
held.
If approved by regulators, the deal would unite two of the major
North American freight carriers, linking factories and ports in
Mexico, farms and plants in the midwestern U.S. and Canada's ocean
ports and energy resources.
The transaction will need approval from the U.S. Surface
Transportation Board, which requires major railroad combinations to
demonstrate they are operating in the public interest by enhancing
competition. The merger partners said they expect the STB review to
be completed by the middle of 2022.
The combined company, to be renamed Canadian Pacific Kansas
City, would have about $8.7 billion in annual revenue and employ
nearly 20,000 people. It would be run by Canadian Pacific CEO Keith
Creel. Kansas City investors would own about 25% of the combined
entity's shares.
Kansas City Southern is the smallest of the five major freight
railroads in the U.S. but plays a key role in U.S.-Mexico trade.
Its network mainly runs up the length of Mexico through Texas to
its namesake city. The company last year rejected takeover bids
worth roughly $20 billion from a group of institutional investors
seeking to take it private, The Wall Street Journal reported.
Canadian Pacific has long sought a union with Kansas City to
extend its reach into its busy freight routes that stretch from
Mexico through southern and midwestern U.S. states. CP's major rail
lines run across Canada, some northern U.S. states and south to
Chicago.
The Canadian railway's leader, Mr. Creel, worked closely with
former chief Hunter Harrison, who made a number of unsuccessful
overtures to buy Kansas City. Mr. Harrison died in 2017 after
taking over and revamping another U.S. operator, CSX Corp.
"This will create the first U.S.-Mexico-Canada railroad," Mr.
Creel said in a statement.
Railway mergers face significant regulatory hurdles in the U.S.
Under Mr. Harrison, Canadian Pacific abandoned a $30 billion
pursuit of Norfolk Southern Corp. in 2016 after the STB expressed
concern about reduced competition and potential safety issues.
Kansas City and Canadian Pacific currently have a single point
where their two networks connect, in a Kansas City, Mo., facility
they jointly operate. The merger could allow trains traveling north
and south to avoid having to interchange cars and potentially
bypass Chicago, a busy and often congested hub in the U.S. freight
system.
The merger partners said the proposed combination wouldn't
reduce choice for customers since there is no overlap between their
systems. They said the possibility for single-line routes would
shift trucks off U.S. highways, reducing congestion and emissions
in the Dallas-to-Chicago corridor.
The freight-rail industry suffered a sharp drop in volume last
year as the pandemic slowed trade and temporarily shut many U.S.
stores, but volume has bounced back as factories continued to
operate and economies recovered. Trade volume has overwhelmed some
U.S. ports, causing congestion and delays.
The companies outlined a two-step process for the deal. Canadian
Pacific will create a trust to acquire Kansas City shares later
this year, if shareholders bless the deal. Kansas City shareholders
will get paid by the trust and the company will continue to be run
by Kansas City's board and management until the STB review is
completed.
The combined company's global headquarters would be in Calgary.
The U.S. headquarters will be in Kansas City, Mo., while Mexico
headquarters will remain in Mexico City and Monterrey.
To fund the transaction, Canadian Pacific said it would issue
44.5 million new shares and raise about $8.6 billion in debt.
Canadian Pacific will also assume about $3.8 billion of Kansas
City's debt. The company expects to have about $20.2 billion in
outstanding debt when the deal closes.
The merger partners said they expect the proposed deal to create
annual savings of about $780 million over three years, partly from
improving on-time performance and running more efficient service.
Canadian Pacific expects the deal to add to its earnings in the
first full year after it takes control of Kansas City.
Write to Jacquie McNish at Jacquie.McNish@wsj.com
(END) Dow Jones Newswires
March 21, 2021 10:15 ET (14:15 GMT)
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