CP and KCS come to terms on merger to combine into first North American single-line network

The respective pursuits of Class I railroad carrier Kansas City Southern (KCS) by Calgary-based Canadian Pacific Railway Company (CP) and its Canadian counterpart Montreal-based Canadian National have come to a stop on the tracks with CP and KCS announcing on September 15 they reached an agreement in which CP will acquire KCS for $31 billion, in a stock and cash transaction, which includes the assumption of $3.8 billion of outstanding KCS debt.

This outcome, which was preceded by months of back-and-forth commentary and posturing between CN and CP, regarding which carrier was better suited to acquire KCS, was made clearer by a September 12 announcement by KCS, which stated that Board of Directors had indicated that the revised offer submitted by CP was a “Company Superior Proposal.”

As for CN, KCS said that it is paying CN a $700 million breakup fee, as well as pay CN an additional $700 million in return of the $700 million previously paid by CN to KCS to reimburse the termination fee paid to CP in May. Both of these payments will be reimbursed to KCS by CP, according to KCS.

CP initially made an offer to acquire KCS in March 2020, when it announced it was acquiring KCS for $29 billion, in a deal that it said, at the time, would establish the first freight railway connecting the United States, Canada, and Mexico. But that deal was squelched when CN last April, made what it called a “superior proposal.” That CN proposal was comprised of a cash-and-stock offer to acquire KCS for $33.7 billion, or $325 per share, which, it said, marked a 21% premium over the initial CP offer.

KCS and CP said that this deal is subject to approval by the Surface Transportation Board (STB), whom last April reaffirmed that it would review the CP-KCS deal under pre-2001 merger rules and also the waiver granted to KCS in 2001 to exempt it from those rules. And they added that STB’s review of this deal is expected to be completed in the second half of 2022. Should the deal be approved, the company will be renamed as Canadian Pacific Kansas City (CPKC) and CP President and CEO Keith Creel will be CEO of the combined entity, with its global headquarters in Calgary and its U.S. headquarters in Kansas City.  

“We are excited to combine to create the first U.S.-Mexico-Canada rail network,” said Creel on a conference call today. “The rationale for this transaction was compelling in March…and even more compelling today. This is an opportunity to bring two iconic companies together, which both have an unapparelled track record of service, safety, and efficiency. It will remain the smallest of the Class I railroad while injecting competition into the North American transportation landscape. We continue to see challenges, and it is undeniable what the pandemic has wrought on our supply chain, and this combination creates stability and opportunity for our customers in the North American transportation network.”  

And KCS President and CEO Pat Ottensmeyer said on the call that KCS and CP have been the two fastest-growing railroads in the industry in the recent past, adding that this combination is driven by growth, and opportunity that a one-of-a-kind North American rail franchise is going to create.

“Not only will we be participating in the growth that the USMCA (United States-Mexico-Canada Agreement) and other factors are creating for a resurgence of manufacturing in North America, we believe that this combination—and the creation of this network—will help drive that growth and attract manufacturing and investments back to all three countries in North America,” he said. “This creates truck-competitive options and single-line service options to leverage this network and provide significant environmental advantages and reduced carbon emissions by converting truck traffic into the railroad. We will both achieve diversification in our service offerings for both companies versus what we have today and access new markets and new growth opportunities in the future.”

Ottensmeyer added that CPKC provides a terrific footprint, as well as port access, and access to most of the major growing industrial markets across North America, and he reiterated that this transaction is built on growth and creating new outlets for customers, extending the environmental benefits of rail, and creating new competitive options for single-line rail service that doesn’t exist today.