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Canadian Pacific and Kansas City Southern to combine to create first US-Mexico-Canada rail network; $29B enterprise value

Canadian Pacific Railway (CP) and Kansas City Southern (KCS) have entered into a merger agreement, under which CP has agreed to acquire KCS in a stock and cash transaction representing an enterprise value of approximately USD$29 billion, which includes the assumption of $3.8 billion of outstanding KCS debt. The transaction, which has the unanimous support of both boards of directors, values KCS at $275 per share, representing a 23% premium, based on the CP and KCS closing prices on 19 March 2021 (and $270 per share, representing a 26% premium, based on the respective CP and KCS 30-day volume weighted average prices).

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Following the closing into a voting trust, common shareholders of KCS will receive 0.489 of a CP share and $90 in cash for each KCS common share held.

Following final approval from the Surface Transportation Board (STB), the transaction will combine the two railroads to create the first rail network connecting the US, Mexico, and Canada. Joining seamlessly in Kansas City, Mo., CP and KCS together will connect customers via single-network transportation offerings between points on CP’s system throughout Canada, the US Midwest, and the US Northeast and points on KCS’ system throughout Mexico and the South Central US.

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The combined network’s new single-line offerings will deliver expanded market reach for customers served by CP and KCS, provide new competitive transportation service options, and support North American economic growth. Additionally, efficiency and service improvements are expected to achieve meaningful environmental benefits.

While remaining the smallest of six US Class 1 railroads by revenue, the combined company 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.

The combination will provide an enhanced competitive alternative to existing rail service providers and is expected to result in improved service to customers of all sizes. Grain, automotive, auto-parts, energy, intermodal, and other shippers, will benefit 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.

Following final regulatory approval, a single integrated rail system will connect premier ports on the US 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.

CP and KCS interchange and operate an existing shared facility in Kansas City, Mo., which 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. 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.

Improving highway traffic, environmental sustainability, and safety. In addition to providing new competition against other railroads, the new single-line routes made possible by the transaction are expected to shift trucks off crowded US highways, yielding reduced highway traffic, lower emissions, and less need for public investments in road and highway bridge repairs. In the Dallas to Chicago corridor alone, the synergies created by this combination are expected to result in meaningful reduction in truck traffic on publicly funded highways.

Rail is four times more fuel-efficient than trucking; one train can keep more than 300 trucks off public roads and produce 75% less greenhouse gas emissions. CP is committed to sustainability and is currently developing North America’s first line-haul hydrogen-powered locomotive.

Comments

SJC

They could use fuel cells and natural gas to clean it up

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