Canadian Pacific and Kansas City Southern on Sunday announced plans to join forces in a $ 29 billion deal that would create the first rail network to link the United States, Mexico and Canada.
This is an effort to capitalize on the trade flows expected to flow through the three countries after President Donald J. Trump signed the United States-Mexico-Canada deal last year. It is also a bet on the strength of the industrial economy as the United States recovers from the pandemic.
The Canadian Pacific Railway connects the 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 joint facility in Kansas City, Missouri, where Kansas City Southern is based.
“This deal has so many long-term strategic benefits,” Kansas City Southern general manager Patrick J. Ottensmeyer said in an interview. “Our board of directors really saw the value of bringing these two companies together now.”
The amalgamated 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 approximately 20,000 miles of track and generate sales of approximately $ 8.7 billion. Canadian Pacific Chief Executive Officer Keith Creel will oversee the new entity.
The deal values Kansas City Southern at $ 275 per share, which is a 23% premium over its closing price on Friday. Investors will receive 0.489 Canadian Pacific shares and $ 90 in cash for each Kansas City common share.
This is also a significant increase from the $ 208 per share offer from Blackstone Group, a private equity firm, which Kansas City Southern rejected last year. Kansas City shares are up 12% year-to-date, while Canadian Pacific shares are up nearly 10%.
The boards of both companies unanimously approved the cash and stock deal, which is expected to close by mid-2022, subject to customary approvals.
The railway industry can be considered as an indicator of industrial activity; he hopes to take advantage of a growing US economy after the pandemic is over. The Federal Reserve has expressed optimism about the country’s economic outlook, and President Biden signed a $ 1.9 trillion spending bill this month.
Investors from Canadian Pacific and Kansas City Southern aren’t the only ones who are optimistic about the industry’s outlook. Warren Buffett, whose Berkshire Hathaway owns BNSF Railway, recently touted the value he sees in the US rail industry in his annual letter.
Railroad executives on Sunday highlighted other opportunities they see in the deal. Mr. Creel called the merger a “compelling opportunity to get trucks off the road” as the United States focuses on a transition to a greener economy. It also reduces risks in the global supply chain after a pandemic that exposed its weaknesses, Mr Ottensmeyer said.
The deal must be approved by the Surface Transportation Board, a division of the Department of Transportation, which has previously recognized concerns that rail consolidation has resulted in service problems for shippers. Canadian Pacific’s past efforts to acquire US railways have failed, in part because of these concerns. That includes talks with CSX Corporation in 2014 and Norfolk Southern in 2016. And the Biden administration has already signaled a stronger stance on antitrust control.
Due to its size, Kansas City Southern is exempt from guidelines put in place in 2001 to tighten control of transactions in the industry. The merged company would still be the smallest of the six largest freight railroads still in operation in the United States. The two railroads do not overlap, Mr Creel and Mr Ottensmeyer said – and in some cases the transaction will create new markets.
“There is no other agreement that represents the uniqueness of this agreement,” Mr. Creel said.