By: Alan Yang and Luka Pavlesen
On September 15, 2021, Canadian Pacific Railway Limited (NYSE: CP) and Kansas City Southern (NYSE: KSU) (“KCS”) announced that they have entered into a merger agreement under which CP will acquire KCS for approximately USD$31 billion. The transaction prices KCS at $300 per share (a 34% acquisition premium) and has the unanimous support of both boards of directors. Together, the proforma entity is expected to provide an unprecedented reach via a combined transport network across Canada, Mexico, and the U.S. for both material and commercial transportation.
The merger between KCS and CP is projected to have massive business benefits for both the companies involved. At least, such is the hope for CP President and CEO Keith Creel, who emphasizes that “this [merger] creates the first U.S.-Mexico-Canada rail network with new single-line offerings that will deliver dramatically expanded market reach for CP and KCS customers”. Stakeholders of each company receive benefits as CP is to assume $3.8 billion in KCS debt and each KCS common shareholder is to receive 2.884 CP common shares and $90 cash. Consumers hope that the newly merged company offers greater competition within the transport industry, more eco-friendly transport solutions given the environmental advantage of trains versus trucks and efficient single line services. However, the complete opposite can also happen, with many stakeholders worried that the merger will monopolize the market rather than diversify it and bring reduced infrastructure investment to the rail train industry instead of expanding it. Only time will tell which side of the coin the merger flips on to.
The closing of the CP-KCS transaction is subject to the approval of the Surface Transportation Board (STB). Historically, large cross-country railroad mergers have not been favorable when brought in front of the STB; the board has rejected numerous transactions of similar scope, citing the anti-competitive nature of monopolies and failure to stay consistent with the public interest. The most applicable precedent would be when the STB blocked the BNSF and Canadian National merger in 1999, claiming shipping and supply chain disruptions. Analysts and management are both highly confident that the proposed transaction will attain full regulatory approval. In a recent interview with Bloomberg Markets, Mr. Creel stated that “I am convinced that [the STB] will see the same truth… I’m confident that when they look at the facts, when we educate and answer their questions… they are going to come to the same conclusion. I’m convinced of that.” At the centre of Keith’s optimism is the fact that there is no network overlap for this unique combination; he firmly believes that this transaction will increase competition, drive further growth, and contribute greatly to the North American economy
The final review and decision of CP’s acquisition is expected to be completed in the second half of 2022. If approved, CP-KCS will form an unrivaled network of services which are expected to increase competition and maintain service quality.