Canadian Pacific Railway
Kansas City South
for $ 29 billion, including the assumption of $ 3.8 billion in debt. Investors will likely outbid all rail stocks during Monday’s session.
The merger would create the first rail network to link Canada, the United States and Mexico. In large part, the deal is a gamble on an escalation in North American trade, nearly a year after the new United States-Mexico-Canada agreement, or USMCA, superseding the free agreement came into effect. -26 year old North American exchange, or Nafta.
The new competition that we will be injecting into the North American transportation market cannot happen soon enough, as the USMCA’s new trade agreement between these three countries makes the efficient integration of the continent’s supply chains more important. than ever, Keith Creel, President and CEO of
Canadian Pacific Railway,
said Sunday in a statement announcing the deal. Creel will become CEO of the combined company, which will be based in Calgary.
Indeed, railways, like other industrial companies, have overtaken the rest of the market as the global economy emerges from its Covid-induced slumber. Industrial companies in the S&P 500, for example, have risen about 10% in the past three months. The technical components of the index are flat over the same period.
It is a cash and stock transaction. Kansas City Southern shareholders (ticker: KSU) are expected to receive $ 90 plus 0.489 Canadian Pacific (CP) shares for each Kansas City Southern share they own.
This works out to about $ 275 per share based on the Friday CP closing price of $ 378.48. Kansas City shares closed at $ 224.16 on Friday. The offer price is 23% above the Friday close.
In September, Kansas City Southern rejected a repurchase offer of $ 208 per share from Global Infrastructure Partners and the
The Wall Street Journal reported at the time, citing people familiar with the subject.
The merger will be the biggest rail deal since Warren Buffetts
(BRK.A) purchased Burlington Northern Santa Fe in 2010. Other larger rail deals have since been considered but have not been completed. Canadian Pacific, for example, attempted to buy
(NSC) a few years ago, but abandoned the effort in the face of regulatory merger.
Railway mergers have become rarer and more difficult to achieve. The industry is already relatively consolidated, which makes antitrust considerations an important factor. Companies that pay railways for services do not like to see less competition. But Kansas City Southern is unique. He has an exemption, granted decades ago, by the US Surface Transportation Board, or STB, facilitating the merger of Kansas City Southern with another major railroad.
In 2018, Barronsreported that Kansas City Southern could become a buyout target.
The STB is an independent federal body that regulates certain aspects of surface transportation, primarily freight rail transportation. He has to approve a railway merger. The Financial Times reported that the two companies informed the STB of the deal on Saturday.
Consolidation in the rail industry has worked for shareholders, however. Railroad operating profit margins, as well as railroad stocks, have been increasing for years. Railway components of the
have returned about 17% per year on average over the past 10 years, or about 4 percentage points better than the index return.
This year has also started well for rail actions. The Kansas City Southern stock, as of Friday’s close, was up about 10% year-to-date. The shares of Canadian Pacific had increased by about 9%. Both gains are somewhat better than the comparable returns of the S&P 500 and
Dow Jones Industrial Average.
A combined Canadian Pacific-Kansas City Southern would operate some 20,000 miles of railroad, employ nearly 20,000 people and generate total revenues of about $ 8.7 billion. It would still be the smallest of six U.S. Class 1 railroads, the companies said.
Kansas City Southern plays an important role in trade with Mexico. it controls a route from Laredo, Texas, to Mexico City, reaching three major Mexican ports and several industrial towns.
In an article for the specialist journal Railway Age this month, Patrick Ottensmeyer, CEO of Kansas City Southerns, highlighted the growing importance of imports of manufactured goods from Mexico to the United States, reversing the trend of imports from low-cost Asian countries. This development, he wrote, was part of a unique opportunity for North America to emerge as an even more powerful force in global manufacturing and commerce.
The two companies will hold a conference call with investors on Sunday at 2:00 p.m. EST.
Write to Al Root at [email protected]