Canadian railroad Canadian Pacific (CP) has agreed to buy US carrier Kansas City Southern (KCS) for $29bn ($C36bn) in stock and cash to create a new entity with operations running from Canada to Mexico.
If approved by regulators, the new Canadian Pacific Kansas City (CPKC) will combine CP's operations in Canada, the US Midwest and the US northeast with KCS' operations in the south-central US and Mexico, including Kansas City Southern de Mexico.
CP and KCS independently are the smallest Class I railroads in the US, and a combined entity would remain the smallest among the major carriers.
In announcing the deal today, the parties said the merger will benefit energy, grain, automotive and intermodal customers.
"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," CP chief executive Keith Creel said today.
The boards of directors of each railroad have agreed unanimously to support the deal, which values KCS at $275/share, a 23pc premium based on its closing price on 19 March. Under the terms of the deal, CP will assume $3.8bn in KCS debt. Creel has been tapped to serve as chief executive of the combined entity.
KCS chief executive Patrick Ottensmeyer said a merger will give KCS customers "access to new, single-line transportation services that will provide them with the best value for their transportation dollar and a strong competitive alternative to the larger Class Is."
CP and KCS said today that no customers would lose transportation options as a result of the purchase.
In past railroad mergers, some customers have lost competitive options when facilities were served by more than one railroad involved in a transaction. Such situations were usually resolved through contract negotiations or intervention by the US regulator, the Surface Transportation Board (STB).
The new railroad will be able to provide single-line competition for shipments of energy, chemicals, plastics and merchandise moving between Canada, the US and Mexico. Single-line service is sometimes cheaper and more efficient than moving shipments between two or more railroads for delivery.
Shippers will benefit from the increased efficiency of the combined network, the railroads said. And shippers will have expanded access to markets they were unable serve before the transaction. The combined railroad will have access to ports on the Atlantic, Pacific and Gulf coasts.
CP and KCS only connect at one point — a shared facility in Kansas City, Missouri.
But the merger will improve service between KCS-served points and the upper Midwest and western Canada and allow KCS' shippers to bypass the congested Chicago, Illinois, transportation hub by accessing CP's route through Iowa, the parties said.
CP and KCS expect the STB's final review of the transaction will be finalized by the middle of 2022.
CP's Creel will serve as the new railroad's chief executive.
The new CPKC will be headquartered in Calgary, Alberta. The company's US base will be in Kansas City, Missouri, while its Mexico headquarters will be in Mexico City and Monterrey.
