By Jacquie McNish
Canadian Pacific Railway Ltd. agreed to acquire Kansas City
Southern in a transaction valued at about $25 billion that would
create the first freight-rail network linking Mexico, the U.S. and
Canada.
The combination, which faces a lengthy regulatory review, is a
long-term wager on an interconnected North American economy. The
three countries are reopening at different speeds after the
Covid-19 pandemic disrupted supply chains and upended global trade.
Rail volumes, which plunged last year, have rebounded though
backlogs at California ports have delayed imports from Asia and
stalled some U.S. factories.
It marks the third major U.S. railroad that the Canadian company
has targeted in its quest to create a transcontinental network.
Canadian Pacific abandoned the two prior efforts -- in 2014 and
2016 -- amid resistance from the takeover targets themselves as
well as opposition from rivals, shippers and U.S. regulators.
Keith Creel, chief executive of Canadian Pacific, said lessons
were learned from the failed bids. He expects Kansas City's support
for the proposed merger and said the lack of rail-line duplication
between the two companies will minimize potential regulatory
concerns. "You have two like-minded companies that are committed to
this and see the value," he said.
Patrick Ottensmeyer, CEO of Kansas City, said the new
U.S.-Mexico-Canada trade agreement, which replaced Nafta in July
2020, creates a unique opportunity to ship freight through the
three countries as their economies recover from the pandemic.
"This company is going to have a North America rail footprint
that is truly unmatched," Mr. Ottensmeyer said in an interview. The
combined railway could reduce the need for trucks to link
production sites and allow cargo to avoid congested California
ports.
If approved by regulators, the deal would unite the two smallest
of the seven major North American freight carriers, linking
factories and ports in Mexico, farms and plants in the Midwestern
U.S. and Canada's ocean ports and energy resources.
The transaction will need approval from the U.S. Surface
Transportation Board, which requires major railroad combinations to
demonstrate they are operating in the public interest by enhancing
competition. The merger partners said they expect the STB review to
be completed by the middle of 2022.
The combined company, to be renamed Canadian Pacific Kansas
City, would have about $8.7 billion in annual revenue and employ
nearly 20,000 people. It would be run by Canadian Pacific's Mr.
Creel. Kansas City investors would own about 25% of the combined
entity's shares. Mr. Creel said there are no plans to reduce staff
if the merger is approved.
Mr. Creel said talks were initiated late last year after he
called Mr. Ottensmeyer to propose a merger that Kansas City had
rebuffed in previous years. At the time Kansas City's board was
reviewing overtures from private-equity firms seeking to take it
private.
Kansas City in September rejected a takeover bid valued at
roughly $20 billion from Blackstone Group Inc. and Global
Infrastructure Partners, The Wall Street Journal reported.
The Kansas City directors ultimately approved Canadian Pacific's
offer because shareholders would retain a minority stake in the
merged company, people familiar with the matter said.
The companies said Sunday their boards agreed to a deal that
values Kansas City at $275 a share in a combination of cash and
stock. Kansas City investors will receive 0.489 of a Canadian
Pacific share and $90 in cash for each Kansas City common share
held.
Kansas City is the smallest major freight railroad in the U.S.
but plays a key role in U.S.-Mexico trade. Its network mainly runs
up the length of Mexico through Texas to its namesake city.
Canadian Pacific has long sought a union with Kansas City to
extend its reach into its busy freight routes that stretch from
Mexico through southern and Midwestern U.S. states. Canadian
Pacific's major rail lines run across Canada, some northern U.S.
states and south to Chicago.
The Canadian railway's leader, Mr. Creel, worked closely with
former chief Hunter Harrison, who made a number of unsuccessful
overtures to buy Kansas City. Mr. Harrison died in 2017 after
taking over and revamping another U.S. operator, CSX Corp.
Railway mergers face significant regulatory hurdles in the U.S.
Under Mr. Harrison, Canadian Pacific abandoned a $30 billion
pursuit of Norfolk Southern Corp. in 2016 after the STB expressed
concern about reduced competition and potential safety issues.
Canadian Pacific also made two unsuccessful overtures to combine
with CSX, which like Norfolk operates mostly in the eastern
U.S.
Kansas City and Canadian Pacific currently have a single point
where their two networks connect, in a Kansas City, Mo., facility
they jointly operate. The merger could allow trains traveling north
and south to avoid having to interchange cars and potentially
bypass Chicago, a busy and often congested hub in the U.S. freight
system.
The merger partners said the proposed combination wouldn't
reduce choice for customers since there is no overlap between their
systems. They said the possibility for single-line routes would
shift trucks off U.S. highways, reducing congestion and emissions
in the Dallas-to-Chicago corridor.
The companies outlined a two-step process for the deal. Canadian
Pacific would create a trust to acquire Kansas City shares later
this year, if shareholders bless the deal. Kansas City shareholders
would be paid by the trust, and the company would continue to be
run by Kansas City's board and management until the STB review is
completed. If the regulator rejects the merger, the trust will
divest its Kansas City shares under a plan to be approved by the
regulator.
The combined company's global headquarters would be in Calgary.
The U.S. headquarters would be in Kansas City, Mo., while the
Mexico headquarters would remain in Mexico City and Monterrey. The
proposed deal must also be approved by officials in Mexico.
To fund the transaction, Canadian Pacific said it would issue
44.5 million new shares and raise about $8.6 billion in debt.
Canadian Pacific would assume about $3.8 billion of Kansas City's
debt. The company expects to have about $20.2 billion in
outstanding debt when the deal closes.
The merger partners said they expect the proposed deal would
create annual revenue gains and savings of about $780 million over
three years. Canadian Pacific expects the deal to add to its
earnings in the first full year after it takes control of Kansas
City.
Write to Jacquie McNish at Jacquie.McNish@wsj.com
(END) Dow Jones Newswires
March 21, 2021 17:47 ET (21:47 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
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