Canadian Pacific Railway to Buy Kansas City Southern for $25B

(Reuters) -
The Stoney Creek Bridge along the CPR. (David R. Spencer)

Canadian Pacific Railway Ltd on Sunday said it has agreed to buy Kansas City Southern for $25 billion in a cash-and-shares deal to create the first rail network connecting the United States, Mexico, and Canada.

Shareholders of Kansas City Southern 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 an enterprise 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.

“This transaction will be transformative for North America, providing significant positive impacts for our respective employees, customers, communities and shareholders,” Canadian Pacific Chief Executive Keith Creel said in the statement.

“This will create the first U.S.-Mexico-Canada railroad.”

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

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

Kansas City Southern’s board has approved the bid and the two companies have notified the U.S. Surface Transportation Board to seek the agency’s required approval.

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

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

The Financial Times first reported on the deal on Sunday.

Calgary-based Canadian Pacific is Canada’s No. 2 railroad operator, behind Canadian National Railway Co. Ltd., with a market value of $50.6 billion.

It owns and operates a transcontinental freight railway in Canada and the United States. Grain haulage 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, focused on the north-south freight corridor connecting commercial and industrial markets in the central United States with industrial cities in Mexico.

Canadian railroad operators’ attempts to buy U.S. rail companies have met limited success because of antitrust concerns.

Canadian Pacific’s latest attempt to expand its U.S. business comes after it dropped a hostile $28.4 billion bid for Norfolk Southern Corp. in April 2016. Canadian Pacific’s merger talks with CSX Corp., which owns a large network across the eastern United States, failed in 2014.

A bid by Canadian National Railway Co, the country’s biggest railroad, to buy Warren Buffett-owned Burlington Northern Santa Fe was blocked by U.S. antitrust authorities in 1999-2000.