CP and KCS jointly file merger application with the Surface Transportation Board

Following the closing of the agreement reached in mid-September between Class I railroad carrier Kansas City Southern (KCS) and Calgary-based Canadian Pacific Railway Company, 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, the companies announced late last week they are now officially ready to take the next step in their relationship.

That next step is their joint filing of a railroad control application with the Surface Transportation Board (STB)—an independent adjudicatory and economic-regulatory agency charged by Congress with resolving railroad rate and service disputes and reviewing proposed railroad mergers—about the transaction to establish the new company Canadian Pacific Kansas City (CPKC), which would become the lone single-line railroad connecting the United States, Mexico, and Canada.

CP and KCS said that the control application provides:

• an overview of the proposed operational integration of the CP and KCS rail networks, -the impact of that consolidation on the companies' finances and labor needs; and
• the anticipated competitive and other benefits that will flow from providing shippers with new and better transportation alternatives

They also added that information in the filing outlines the public and customer benefits a CP-KCS combination would bring, including more efficient north-south trade arteries to support the interconnected supply chains of the United States, Mexico and Canada.

CP and KCS said that this transaction is subject to approval by CP and KCS shareholders along with satisfaction of customary closing conditions, which include Mexican regulatory approvals. Shareholders are expected to vote on this transaction later in 2021.

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. 

CP and KCS leadership both indicated that they welcome the joint filing of this application.

“We are excited to file our joint application for this unique, pro-competitive combination and once-in-a-lifetime partnership,” said Keith Creel, CP President and Chief Executive Officer, in a statement. “CPKC is an extraordinary opportunity to inject new competition and new capacity into the U.S. rail network, further USMCA trade flows, improve safety, grow employment and facilitate new passenger services. We are ready to work with the STB as the board gives this transaction a thorough and appropriate review, and ultimately look forward to approval so we can get to work delivering these benefits to the North American economy.”

Pat Ottensmeyer, KCS President and CEO, said in the same statement that the companies are pleased to submit this application together and take another important step toward bringing to fruition this historic opportunity for CP and KCS.

“In fierce competition with other railroads, trucks and other modes of transportation, CPKC will provide new routes, reach broader markets and create expanded shipping opportunities for customers,” he said. “This combination will also unlock new infrastructure investment and environmentally-friendly supply chain transportation options that will grow the USMCA economy.”

On a mid-September conference call, both executives touted the benefits of this deal.

Creel explained it 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,” he said. “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.”  

Ottensmeyer said 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.