CP Buys Kansas City Southern in $29B Deal Creating First U.S.-Mexico-Canada Rail Network

In a deal marking the biggest evolutionary step in North American railways since 1996 when CSX merged with Conrail, Canadian Pacific (CP) and Kansas City Southern (KCS) announced their agreement to merge, creating the first rail network to connect the U.S., Mexico, and Canada.

The combination has already received unanimous approval from the boards of both railroads, but will need to secure final approval of the U.S. Surface Transportation Board, which both companies are confident will come through in mid-2022.

In 2001 the Surface Transportation Board amended its merger regulations requiring that in deals involving Class I railways, the parties must demonstrate a benefit to the public. However, this regulation was sidelined in this case due to the small size of KCS which will likely limit scrutiny.

"I don't see it as the kind of consolidation that should raise concerns because it's what you call an end-to-end or vertical merger,” Clifford Winston, economist and senior fellow specializing in the transportation sector with the Brookings Institution, told the Duluth News Tribune. “Their networks fit nicely with each other and help fill out North America with real service.”

Under the terms of the deal, which reflects the largest ever North American railway deal by value, CP has agreed to acquire KCS in a $29 billion stock and cash transaction (including $3.8 billion in outstanding KCS debt). To fund the transaction, Calgary-based CP will issue 44.5 million new shares and raise $8.6 billion in debt to pay $275 per KCS share, of which $90 will be cash, with the balance offered in stock.

The combination brings together two of the smallest of the seven Class I railways in the U.S. - but, importantly, the two have no overlap in their networks. Joining in Kansas City, Missouri, the CP runs through southern Canada, through the U.S. Midwest, and in the U.S. Northeast, while KCS runs throughout Mexico and the South Central region of the U.S.

Despite remaining the smallest of the six U.S. Class I railways by revenue, this combination will end in a much larger and more competitive network operating approximately 20,000 miles of rail and employing nearly 20,000 individuals to generate total revenues of approximately $8.7 billion based on 2020 records.

“CP and KCS have been the two best performing Class 1 railroads for the past three years on a revenue growth basis,” said Keith Creel, president and CEO, CP. “This transaction will be transformative for North America, providing significant positive impacts for our respective employees, customers, communities, and shareholders.”

Creel continued, “This will create the first U.S.-Mexico-Canada railroad, bringing together two railroads that have been keenly focused on providing quality service to their customers to unlock the full potential of their networks.”

The resulting combined network will offer grain, energy, and other North American shippers increased efficiency, great simplicity, improved service, and an enhanced competitive alternative to existing rail service providers to support customers in growing their rail volumes.

Environmentally, the merger will reduce highway truck traffic (rail transport is four times more fuel efficient than trucking, and one train can keep more than 300 trucks off public roads), lower emissions (rail transport produces 75 percent less greenhouse gas emissions compared to truck transport), and will reduce the need for public investment in road, highway, and bridge repairs. With sustainability in mind, CP is also currently developing the first line-haul hydrogen-powered locomotive in North America.

“KCS has long prided itself in being the most customer-friendly transportation provider in North America,” said Patrick J. Ottensmeyer, president and CEO, KCS. “In combining with CP, customers will have access to new, single-line transportation services that will provide them with the best value for their transportation dollar and a strong competitive alternative to the larger Class 1s. Our companies’ cultures are aligned and rooted in the highest safety, service and performance standards.”

Once final regulatory approvals are through, the new railway will offer unprecedented reach via its single-line hauls across its continent-wide network connecting ports on the U.S. Gulf, Atlantic, and Pacific Coasts.

“The new competition we will inject into the North American transportation market cannot happen soon enough, as the new USMCA Trade Agreement among these three countries makes the efficient integration of the continent’s supply chains more important than ever before,” said Creel.

“Over the coming months, we look forward to speaking with customers of all sizes, and communities across the combined network, to outline the compelling case for this combination and reinforce our steadfast commitment to service and safety as we bring these two iconic companies together.”

- Lynda Kiernan is editor with GAI Media, and is managing editor and daily contributor for Global AgInvesting’s AgInvesting Weekly News and Agtech Intel News, and HighQuest Group's Oilseed & Grain News. She is also a contributor to the GAI Gazette. She can be reached at lkiernan@globalaginvesting.com.