As expected, Canadian Pacific Railway and Kansas City Southern last week re-entered into a merger agreement under which CP will acquire KCS in a stock and cash transaction representing approximately $31 billion USD.
The agreement follows a Surface Transportation Board ruling earlier this month that rejected Canadian National’s request to form a voting trust agreement in an effort to acquire KCS. Also, KCS terminated CN’s offer of $33.6 billion last weekWednesday to pursue the deal with CP.
CP and KCS agreed in March to form Canadian Pacific-Kansas City (CPKC), but KCS backed out when CN put in a higher offer the following month.
Like the previous deal, CP will assume $3.8 billion of outstanding KCS debt. The transaction, which has the unanimous support of both boards of directors, values KCS at $300 per share, representing a 34 percent premium, based on the CP closing price Aug. 9, 2021.
“Our path to this historic agreement only reinforces our conviction in this once-in-a-lifetime partnership,” said CP President and Chief Executive Officer Keith Creel. “We are excited to get to work bringing these two railroads together. By combining, we will unlock the full potential of our networks and our people while providing industry-best service for our customers.”
Creel added that the deal, which creates the first U.S.-Mexico-Canada rail network, will expand market reach for CP and KCS customers and provide new competitive transportation options that support North American economic growth.
KCS President and Chief Executive Officer Patrick J. Ottensmeyer said the CP-KCS combination will benefit customers, labor partners and shareholders through new, single-line transportation services and complementary routes.
“It will also benefit KCS and our employees by enabling us to become part of a growing and truly North American continental enterprise,” he said.
Railroad will operate 20,000 miles, generate about $8.7 billion in revenue
While remaining the smallest of six U.S. Class 1 railroads by revenue, the combined company would have a much larger and more competitive network, the railroads say. The new railroad would operate approximately 20,000 miles of rail, employ close to 20,000 people and generate total revenues of approximately $8.7 billion based on 2020 actual revenues.
The CP-KCS combination is expected to create jobs across the joined network. Additionally, the companies expect efficiency and service improvements to achieve meaningful environmental benefits.
The deal is subject to regulatory approval.
Severing the CN agreement will cost KCS $1.4 billion. KCS must pay a $700 million termination fee to CN, plus return $700 million paid by CN to reimburse a termination fee paid to CP in May. Both payments will be reimbursed to KCS by CP. KCS is obligated to refund CP’s reimbursement under certain limited circumstances, including if KCS terminates the CP merger agreement to accept a superior proposal.
CN is also not obligated to pay any termination fees as a result of the termination of the CN merger agreement.