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March 21, 2021 1:45 PM, EDT

CP Rail Agrees to Buy Kansas City Southern for $25 Billion

 A Canadian Pacific train transporting oil leaves Hardisty, Alberta. (Bloomberg News) A Canadian Pacific train transporting oil leaves Hardisty, Alberta. (Bloomberg News)

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Canadian Pacific Railway Ltd. and the Kansas City Southern Railway will merge as part of a $25 billion transaction that will create a freight rail network that stretches from Canada to Mexico, the Class I railroads announced March 21.

CP also will assume $4 billion of Kansas City Southern's debt. The agreement will require regulatory review and eventually approval from the Surface Transportation Board. Officials from both companies said that process could take a year. 

Officials from both railroads said their respective board of directors have given unanimous approval for the agreement. 

Keith Creel

Creel

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

Of the five major freight railroads in the U.S., Kansas City Southern is the smallest, but it is the only carrier with operations in Mexico, running north-south through Texas and to its namesake city. Canadian Pacific has long sought a partnership with Kansas City Southern so it can extend its existing rail network from its home base in Calgary, Alberta. and the Midwest south.

The new operation will be called Canadian Pacific Kansas City.

Creel said the adoption of the new U.S., Mexico-Canada trade agreement was one of the main reasons behind the merger. 

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.”

The combined network is expected to operate approximately 20,000 miles of rail, employ close to 20,000 workers and generate total revenues of approximately $8.7 billion based on 2020 figures.

“I’ve had my eye on the KCS for quite some time,” Creel told Bloomberg News. “We extend our reach for our customers through the U.S. and into Mexico, and at the same time KCS can do the same coming from Mexico up to U.S. destinations and Canada.”

A Kansas City Southern locomotive passes through Knoche Yard in Kansas City, Mo. (Whitney Curtis/Bloomberg News)

A Kansas City Southern locomotive passes through Knoche Yard in Kansas City, Mo. (Whitney Curtis/Bloomberg News)

The combination — the biggest purchase of a U.S. asset by a Canadian company since 2016 — would provide a transportation solution for manufacturers seeking to bring factories back to North America after the pandemic exposed risks of relying on overseas supply chains, Creel said.

Kansas City investors will receive 0.489 of a CP share and $90 in cash for each share they hold, valuing the stock at $275 apiece — 23% more than March 19’s record close, according to a statement from both companies March 21.

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The deal comes as trade across the three nations is expected to pick up under the Biden administration. Just days after his inauguration, President Joe Biden spoke with the leaders of Canada and Mexico, his first calls with foreign counterparts, where issues from trade to climate change were discussed.

Mexico is a crucial supplier of vehicles, auto parts, electronics and food and a major customer of grain, fuel and consumer goods — ties that are likely to be strengthened by July’s passage of the U.S.-Mexico-Canada trade pact.

Kansas City’s unique network linking Mexico’s largest industrial cities and ports to the Midwest would be positioned to benefit if the coronavirus pandemic and fraying ties between the U.S. and China prompt companies to move lower-wage manufacturing from Asia to North America.

As part of the transaction, CP will issue 44.5 million new shares, to be financed with cash-on-hand and about $8.6 billion in debt. CP’s debt would jump to about $20 billion and leverage would increase to about four times earnings before interest, taxes, depreciation and amortization. Free cash flow of about $7 billion a year from the combined railroad would help CP whittle that down to 2.5 times in three years.

Bloomberg News contributed to this report.

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