CP announces planned acquisition of Kansas City Southern for $29B, in major industry shakeup

The footprint of the North American Class I railroad landscape is dramatically changing form, with this weekend’s landmark announcement that Calgary-based Canadian Pacific (CP) is acquiring Kansas City Southern (KCS) for $29 billion, in a deal that will establish the first freight railway connecting the United States, Canada, and Mexico.

CP officials said that this $29 billion deal is a stock and cash transaction and includes the assumption of $3.8 billion of outstanding KCS debt and values KCS at $275 per share, representing a 23% premium, based on the CP and KCS closing prices on March 19, 2021.

“This transaction will be transformative for North America, providing significant positive impacts for our respective employees, customers, communities, and shareholders,” said CP President and Chief Executive Officer Keith Creel 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. 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. Over the coming months, we look forward to speaking with customers of all sizes, and communities across the combined network, to outline the compelling case for this combination and reinforce our steadfast commitment to service and safety as we bring these two iconic companies together.”

And CP added that CP and KCS will jointly connect shipper customers through single-network transportation offerings between points on CP’s system throughout Canada, the U.S. Midwest, and the U.S. Northeast and points on KCS’ system throughout Mexico and the South Central U.S. 

Other key benefits of this transaction include:

• expanded market reach for customers served by CP and KCS;
• new competitive transportation service options, and supporting North American economic growth;
• the creation of jobs across the combined network; and
• efficiency and service improvements which are expected to achieve meaningful environmental benefits

As a new entity CP said that it would remain the smallest of six U.S. Class 1 railroads by revenue, while it will be a much larger and more competitive network, operating approximately 20,000 miles of rail, employing close to 20,000 people and generating total revenues of approximately $8.7 billion based on 2020 actual revenues.

“KCS has long prided itself in being the most customer-friendly transportation provider in North America,” said KCS President and Chief Executive Officer Patrick J. Ottensmeyer in a statement. “In combining with CP, customers will have 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 1s. Our companies’ cultures are aligned and rooted in the highest safety, service and performance standards. Importantly, KCS employees will benefit from being part of a truly North American continental enterprise, which creates a strong platform for revenue growth, capital investment, and future job creation. Customers, labor partners, and shareholders will all benefit from the inherent strengths of this combination, including attractive synergies and complementary routes.”

In terms of how this combined entity will benefit shippers, CP pointed out various factors, including: providing am enhanced competitive alternative to existing rail service providers expected to result in improved service to customers of all sizes; grain, automotive, auto-parts, energy, intermodal, and other shippers benefiting from the increased efficiency and simplicity of the combined network, which is expected to spur greater rail-to-rail competition and support customers in growing their rail volumes; and having a single integrated rail system will connect premier ports on the U.S. Gulf, Atlantic and Pacific coasts with key overseas markets.

“The combination of CP and KCS networks will offer unprecedented reach via new single-line hauls across the combined company’s continent-wide network,” said CP.

Kansas City interchange: CP and KCS interchange and operate an existing shared facility in Kansas City, Mo., which CP said is the one point where they connect.

“This transaction will alleviate the need for a time consuming and expensive interchange, improving efficiency and reducing transit times and costs,” said CP. “The combination also will allow some traffic between KCS-served points and the Upper Midwest and Western Canada to bypass Chicago via the CP route through Iowa. This will improve service and has the potential to contribute to the reduction of rail traffic, fuel burn, and emissions in Chicago, an important hub city.” 

Completion of this deal is subject to approval from the Surface Transportation Board (STB), which CP said is expected to be completed by mid-2022. It is worth noting that a 2016 white paper by former STB commissioners Francis Mulvey and Charles Nottingham, issued when CP attempted to acquire Norfolk Southern, stated that rail carriers cannot assume control of another carrier without prior STB approval.

“The STB’s approval process can last between 19 and 22 months,” they wrote. “Current STB regulations, adopted in 2001, set a high bar for approval of a proposed major merger and related voting trust based on an untested public interest standard. The freight railroad sector has shrunk from 56 Class I railroads in 1975 to seven in 2005. 

And with the current balance of power in North America among the Class I railroads––two in the east, 2 in the west, one in the middle, and 2 in Canada––industry experts say it has created a very stable playing field, but were one of the legs of this “table” to be pulled, it would require some sort of response among the other members of the supporting cast, which is not likely in their best interests, observed a 2016 shipper survey by investment firm Cowen & Company.

Should the deal be approved, CP’s Creel will be the combined company’s CEO, with the company renamed Canadian Pacific Kansas City (CPKC). The company’s U.S. headquarters will be in Kansas City, with Mexico headquarters staying intact in Mexico City and Monterrey, with CP saying its U.S. headquarters in Minneapolis-St. Paul to “remain an important base of operations.”

Tony Hatch, president of New York-based ABH Consulting, offered up his early thoughts on this deal in a research note.

“My guess is that, despite what I have thought was a more 'interventionist' stance, STB approval is likely as there is little to no overlap—and this is only merger that —by itself, as a standalone—might not trigger full rail consolidation, as any other pairing likely would,” he wrote. “That would be more problematic….this would give CP, like CNI, three-coast access.”