Railroads Strike a $25 Billion Merger
Railway Ltd. agreed to acquire
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.
Patrick Ottensmeyer,
the chief executive of Kansas City Southern, 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.
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‘This company is going to have a North America rail footprint that is truly unmatched.’
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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 CEO
Keith 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 Southern is the smallest of the five major freight railroads 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.
Kansas City and Canadian Pacific…
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