Canadian Pacific agrees to buy Kansas City Southern for $ 29 billion

The Canadian Pacific railroad group has agreed to buy Kansas City Southern for $ 28.9 billion, including debt under the largest acquisition deal this year.

The transaction, first reported by the FT, is the largest in CP history and will take over the smallest of the seven Class 1 rail operators that dominate a significant proportion of freight operations in the United States.

It is the latest attempt to disrupt a structure among the major railways in the US and Canada that has remained unchanged since the two major operators in the eastern US – the two major operators in the eastern US – acquired Conrail and split it up in 1999 .

Keith Creel, CP Managing Director, said: “This will be the first railroad between the US, Mexico and Canada. . .[and combine the]two most powerful class 1 railway lines in the past three years based on sales growth. “

The Calgary-based company pays $ 275 per share, made up of $ 90 in cash and the remainder of its stock. To pay for the deal, CP will issue 44.5 million new shares and take on $ 8.6 billion in debt.

CP’s proposal represents a 23 percent premium over Kansas City Southern’s closing price of $ 224 late last week. The deal values ​​its equity before debt inclusion at $ 24.9 billion.

The two companies informed the Surface Transportation Board, the US rail freight regulator that has to clear the merger, of the deal on Saturday, people with direct knowledge of the matter said.

Investors were concerned that further consolidation would create problems for the STB. There are currently two major competing operators in Canada (CP and Canadian National), CSX and Norfolk Southern in the east of the US and Union Pacific and BNSF in the west. Kansas City Southern, the smallest Class 1, is the only operator focused on north-south operations.

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Kansas City Southern’s performance has been closely tied to trade between the US, Canada and Mexico, with the main routes connecting the US’s two neighboring countries. It also has extensive operations in Mexico and has a 50 percent interest in the Panama Canal Railway Company.

The railroad sector was hit hard in the early stages of the pandemic due to restrictions imposed by the US government to contain the spread of the coronavirus.

The outlook has improved in recent months as the US accelerated its outlook Introduction of vaccines and business activity increased. President Joe Biden’s efforts to strengthen trade ties between the United States and Mexico should further boost rail operations.

Kansas City Southern stocks more than doubled over the past year. The company turned down a takeover bid last September from a consortium led by Blackstone and Global Infrastructure Partners, which valued its shares at $ 21 billion.

Kansas City Southern saw sales decline 8 percent to $ 2.6 billion in 2020 and net income up 23 percent to $ 617 million. According to Capital IQ, the company employs around 6,200 people, compared to nearly 12,000 for the Canadian group.

CP shares are up 80 percent over the past year and are valued at $ 63 billion ($ 50 billion). The company’s largest shareholder is Chris Hohn’s TCI hedge fund, which according to information from the end of last year had a stake of 8.4 percent.

Canadian Pacific addressed earlier first CSX and then Norfolk Southern on possible mergers in 2015 and 2016 under Hunter Harrison, the charismatic executive who was installed after a campaign by Bill Ackman, the activist investor.

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Both offers were rejected and there have been no further merger attempts since Harrison resigned unexpectedly from CP in January 2017. Harrison joined CSX two months later, just before his death in December this year.

This article was modified to reflect the fact that the Surface Transportation Board did not approve the deal

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