Canadian Pacific and Kansas City Southern announced plans Sunday to combine in a $29 billion deal that would create the first railroad network connecting the United States, Mexico and Canada.
It is an effort to capitalize on the trade flows expected to run through the three countries after President Donald Trump signed the United States-Mexico-Canada Agreement into law last year. It’s also a bet on the strength of the industrial economy as the United States rebounds from the pandemic.
Canadian Pacific links major ports on the East and West Coasts between the United States and Canada, while Kansas City Southern connects the United States, Mexico and Panama. The two connect on a single point: a joint facility in Kansas City, Missouri, where Kansas City Southern is based.
“This deal just has so many longer-term strategic advantages,” Kansas City Southern CEO Patrick Ottensmeyer said in an interview. “Our board really saw the value in putting these two companies together right now.”
The combined company, Canadian Pacific Kansas City, will have its global headquarters in Calgary, Alberta, while Kansas City will serve as its U.S. headquarters. It will operate roughly 20,000 miles of rail and generate sales of about $8.7 billion. Canadian Pacific CEO Keith Creel will oversee the new entity.
The deal values Kansas City Southern at $275 per share, representing a 23% premium to its closing price on Friday. Investors will receive 0.489 of a Canadian Pacific share and $90 in cash for each Kansas City common share.
It is also a significant increase from the reported $208 a share offer from the Blackstone Group, a private equity firm, that Kansas City Southern rebuffed last year. Shares of Kansas City are up 12% year to date, while shares of Canadian Pacific have climbed almost 10%.
The boards of both companies have unanimously approved the cash-and-stock deal, which is expected to close by the middle of 2022, subject to customary approvals.
The railroad industry can be viewed as a bellwether of industrial activity; it expects to benefit from a growing U.S. economy as it emerges from the pandemic. The Federal Reserve has signaled optimism for the nation’s economic outlook, and President Joe Biden signed a $1.9 trillion spending bill into law this month.
Investors in Canadian Pacific and Kansas City Southern are not alone in their optimism for the industry’s outlook. Warren Buffett, whose Berkshire Hathaway owns BNSF Railway, recently extolled the value he saw in the U.S. railroad industry in his annual letter.
The railroad executives on Sunday highlighted other opportunities they see in the deal. Creel called the merger a “compelling opportunity to take trucks off the road” at a time when the United States is focused on a transition to a greener economy. It also reduces risks in the global supply chain after a pandemic that highlighted its weaknesses, Ottensmeyer said.
The deal needs approval from the Surface Transportation Board, a division of the Department of Transportation, which has previously acknowledged concerns that railroad consolidation has led to service issues for shippers. Canadian Pacific’s past efforts to acquire U.S. railroads have failed, in part because of such concerns. That includes talks with CSX Corp. in 2014 and Norfolk Southern in 2016. And the Biden administration has already signaled a tougher stance on antitrust scrutiny.
Because of its size, Kansas City Southern is exempt from guidelines put in place in 2001 to tighten deal scrutiny in the industry. The combined company would still be the smallest of the remaining six largest freight railroads operating in the United States. The two railroads have no overlap, Creel and Ottensmeyer said — and, in some cases, the transaction will create new markets.
“There’s zero other deals that represent the uniqueness of this deal,” Creel said.