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Canadian Pacific Railway Ltd. will pay US$25.2-billion in stock and cash to take over Kansas City Southern railway in a deal that will widen the reach of the Calgary-based rail carrier deep into the United States and Mexico.

The deal announced on Sunday requires approval of the U.S. Surface Transportation Board and shareholders of both railways. It has the support of both railways’ boards.

The new railway will be called CPKC and be headquartered in Calgary, said Keith Creel, CP’s chief executive officer, in an interview on Sunday.

CP is Canada’s second-largest railway, behind Canadian National Railway Co. Its network runs to Saint John from Vancouver, but reaches no farther south in the United States than Kansas City, Mo. The deal would allow CP to link in that hub with KCS and extend south to New Orleans on the Gulf Coast, and beyond Mexico City to the Pacific Coast. More than half of KCS’s operations are in Mexico.

The north-south route will allow the combined companies to meet demand for goods moving under the USMCA free-trade agreement among Canada, Mexico and the United States, Mr. Creel said. The combined companies will be able to more efficiently move a range of goods with fewer train handovers, from automotive products to energy and consumer goods.

The deal’s timing coincides with an expected economic surge as the COVID-19 pandemic recedes, and with the start of a new U.S. administration under President Joe Biden, who is making attempts to improve relationships with the country’s neighbours.

Patrick Ottensmeyer, Kansas City Southern’s CEO, said CPKC is poised to capitalize on the trend of nearshoring, or the move by manufacturers to source components from suppliers within North America as opposed to overseas.

“This whole nearshoring phenomenon, I think, is real,” Mr. Ottensmeyer said by phone. “We’re going to see that lead to investments in North America, and this railroad is going to have a just incredible footprint, too, not only to facilitate all of that, but to drive that growth and benefit from the economic growth.”

Mr. Ottensmeyer said the railway’s adoption of a cost-saving operating model known as precision railroading, pioneered by the late Hunter Harrison, gives KCS a “common philosophy” with CP. This shared view “certainly gives us a head start in terms of a cultural compatibility on the operating side of the business,” he said.

Alberta Premier Jason Kenney said the deal is one of the largest foreign takeovers by a Canadian company, and is good news for Alberta’s oil producers, who face a shortage of available pipeline space.

“The combined rail network will give CP direct access to the U.S. Gulf Coast and beyond, allowing it seamlessly to transport Alberta energy directly to Gulf Coast refineries, improving the economics of crude by rail,” Mr. Kenney said. “If approved, this transaction will be good news for Alberta’s economy, expanding one of our largest employers while increasing shipping access to our largest export customers.”

The combined companies will operate 20,000 miles of rail, employ about 20,000 people and have sales of about US$8.7-billion.

KCS is the smallest of the U.S. Class 1 railroads, and has 2020 revenue of US$2.6-billion. CP posted revenue of C$7.7-billion in 2020. The combined entity will remain the smallest of the big U.S. railways.

Investors in KCS will receive 0.489 of a CP share and US$90 in cash for each stock if the deal is approved by a shareholder vote in the coming months.

CP will then acquire the KCS shares and place them in a trust while the U.S. Surface Transportation Board decides if it will approve the deal. The regulatory process is expected to last until the middle of 2022.

The fixed stock exchange ratio implies a KCS share price of US$275, a 26-per-cent premium based on the 30-day average price.

CP will issue 44.5 million new shares to pay for the stock component of the deal, and will cover the cash component from its reserves and by borrowing US$8.6-billion. After assuming US$3.8-billion in KCS debt, CP’s debt will be US$20-billion.

The agreement follows two failed attempts by CP to buy U.S. railways that operate in the eastern part of the country. CP dropped a bid to acquire Norfolk Southern Corp. in 2016 for US$28-billion. Talks to merge with CSX Corp. fell apart in 2014.

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Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 27/03/24 4:46pm EDT.

SymbolName% changeLast
CP-T
Canadian Pacific Kansas City Ltd
+1.44%120.08

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