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

(Bloomberg) — Canadian Pacific Railway Ltd. agreed to purchase Kansas City Southern for $25 billion, searching for to create a 20,000-mile rail community linking the U.S., Mexico and Canada within the first yr of these nations’ new commerce alliance.

The transaction creates the one community that cuts by all three North American international locations, giving CP entry to the Kansas City, Missouri-based firm’s sprawling Midwestern rail community that connects farms in Kansas and Missouri to ports alongside the Gulf of Mexico. The community would additionally let CP attain deep into Mexico, which made up virtually half of Kansas City Southern’s income final yr.

“I’ve had my eye on the KCS for quite some time,” CP Chief Executive Officer Keith Creel mentioned in a phone interview. “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.”

The mixture — the most important buy of a U.S. asset by a Canadian firm since 2016 — would supply a transportation answer for producers searching for to deliver factories again to North America after the pandemic uncovered dangers of counting on abroad provide chains, Creel mentioned. The merger has a “compelling and powerful environmental impact” by attractive extra truck cargo to rail, which is about 4 instances extra gasoline environment friendly, he mentioned.

Kansas City traders will obtain 0.489 of a CP share and $90 in money for every share they maintain, valuing the inventory at $275 apiece — 23% greater than Friday’s file shut, in accordance to a press release from each corporations on Sunday.

Creel might be CEO of the brand new firm, to be primarily based in Calgary, and is predicted to stay on the helm till no less than early 2026, in accordance to a separate assertion. The new entity, to be referred to as Canadian Pacific Kansas City, or CPKC, can have income of about $8.7 billion and virtually 20,000 staff.

Trade Play

The transaction could be the most important Canadian buy of a U.S. asset since Enbridge agreed to purchase Spectra Energy for about $28 billion 5 years in the past, in accordance to knowledge compiled by Bloomberg. That deal closed in early 2017.

The deal comes as commerce throughout the three nations is predicted to decide up below the Biden administration. Just days after his inauguration, U.S. President Joe Biden spoke with the leaders of Canada and Mexico, his first calls with overseas counterparts, the place points from commerce to local weather change had been mentioned.

Mexico is an important provider of automobiles, auto elements, electronics and meals and a significant buyer of grain, gasoline and shopper items — ties which can be possible to be strengthened by July’s passage of the U.S.-Mexico-Canada commerce pact.

Kansas City’s distinctive community linking Mexico’s largest industrial cities and ports to the U.S. Midwest could be positioned to profit if the coronavirus pandemic and fraying ties between the U.S. and China immediate corporations to transfer lower-wage manufacturing from Asia to North America.

As a part of the transaction, CP will subject 44.5 million new shares, to be financed with cash-on-hand and about $8.6 billion in debt. CP’s debt would bounce to about $20 billion and leverage would enhance to about 4 instances earnings earlier than curiosity, taxes, depreciation and amortization. Free money circulate of about $7 billion a yr from the mixed railroad would assist CP whittle that down to 2.5 instances in three years.

CP expects to increase adjusted diluted EPS within the first full yr after finishing the deal, and later generate double-digit accretion. The mixture will lead to about $780 million of effectivity positive aspects over three years, with about three-fourths of that coming from revenue enhance.

No Job Cuts

There might be no workforce reductions, Creel mentioned within the interview, and he predicted the merger will lead to job positive aspects as gross sales develop.

CP will file the merger utility with the U.S. Surface and Transportation Board on Monday and start the method of making a belief that may maintain Kansas City Southern’s shares whereas approval is pending, Creel mentioned. The corporations count on a evaluate by the STB to be accomplished by mid-2022.

That could possibly be an enormous hurdle. CP’s hostile try to purchase Norfolk Southern Corp. starting in 2015 collapsed amid a hail of shipper criticism, together with from United Parcel Service Inc., FedEx Corp. and even the U.S. Army, which makes use of the rails to transport army gear. Creel referred to as the deal “simple and pro-competition” as a result of the 2 networks don’t overlap.

“It provides a positive impact for all stakeholders, including the public interest,” Creel mentioned. “Existing customers get to extend their length of haul and reach into new markets, as well as new customers that this network will naturally attract.”

A Repeat Target

Kansas City Southern, the smallest of the U.S.’s Class I freight railroads, has been a takeover goal earlier than.

In September, Dow Jones reported that the corporate rejected a $20 billion supply from Blackstone Group Inc. and Global Infrastructure Partners. Rumors of Kansas City Southern as a takeover goal have swirled for years, particularly after Canadian National Railway accomplished the acquisition of the Illinois Central Railroad in 1999 that gave it entry to ports within the U.S. Gulf of Mexico.

Creel and Kansas City Southern CEO Pat Ottensmeyer mentioned they started talks on the merger late final yr. The two corporations, which has work collectively for years with railcar exchanges, determined the timing was proper, particularly after the revamped U.S.- Mexico-Canada commerce deal that changed NAFTA, Ottensmeyer mentioned.

“This is a combination that just makes tremendous sense given that lack of overlap and the opportunities such as USMCA present for the outlook for rail and the footprint that this company is going to have in terms of an unmatched North American network,” Ottensmeyer mentioned within the phone interview.

(Adds background and feedback from interview of CEOs beginning within the third paragraph)

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