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Kansas City Southern said its board has recommended CP’s US$27.2-billion takeover to shareholders, who along with CP investors must approve the deal in a vote expected in December.

Gavin John/The Globe and Mail

Keith Creel, the head of Canadian Pacific Railway Ltd. , heralded the formation of the first truly North American rail company after Kansas City Southern terminated its takeover agreement with Canadian National Railway Co. on Wednesday and threw its support behind CP’s offer.

The Missouri-based railway said its board has recommended CP’s US$27.2-billion takeover to shareholders, who along with CP investors must approve the deal in a vote expected in December.

“It’s a unique and historic and exciting combination,” Mr. Creel said.

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The deal, which would form a 20,000-kilometre railway that links both Canadian coasts with the U.S. South and Mexican sea ports and automaking region, requires approval by the Mexican and U.S. regulators. Mr. Creel said CP will seek a 10-month review by the U.S. Surface Transportation Board and hopes to have the takeover concluded in late 2022.

“It’s a great day for CP and KCS,” Mr. Creel said by phone. “We’re tickled to death.”

The railway will employ about 20,000 people, be headquartered in Calgary and be led by Mr. Creel. The name will be CPKC, replacing the long-standing name of the Canadian railway formed in 1881.

“That’s a tongue twister but we’ll all get used to it in time,” Mr. Creel.

To end the CN agreement, KCS will pay CN termination fees worth US$1.4-billion, an amount that will be covered by CP.

CN and KCS’s deal, worth US$29.8-billion and reached in May, was seen as unlikely to receive U.S. regulatory approval after the STB blocked the proposed voting trust, a preliminary step in the takeover. CN this week declined to raise its offer, in light of the long odds of approval.

“We believe that the decision not to pursue our proposed merger with KCS any further is the right decision for CN as responsible fiduciaries of our shareholders’ interests,” said Jean-Jacques Ruest, CN’s chief executive officer, in a statement.

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KCS CEO Patrick Ottensmeyer said he and the company’s managers will stay on when KCS is placed into the CP trust. Voting trusts are intended to preserve the independence and operational integrity of takeover targets while the regulator reviews the deal.

KCS stockholders will receive US$300 a share – US$90 in cash and 2.884 CP shares. CP will assume US$3.8-billion of KCS’s debt. To pay for KCS, CP will borrow US$8.5-billion and issue 262 million shares.

KCS’s network extends from the U.S. Midwest into Mexico, allowing CP to form the first railway that links Canada, the United States and Mexico. The two railways meet in Kansas City, where they share a yard. The executives said this means there is there is no overlap or duplication of service, and reduces the likelihood of layoffs while assuaging the regulator’s antitrust concerns.

“This all about growth,” Mr. Creel said.

“There is no overlap,” Mr. Ottensmeyer said. “Our focus really here is on growth rather than cost-cutting and operating efficiencies. It’s hard to say there aren’t going to be some layoffs, but we think this is going to create jobs, not only administrative jobs but certainly people working out on the railroads in the craft positions.”

CP and KCS first agreed on a US$25.2-billion deal in March, but CN stepped in with a higher bid and KCS switched sides. However, CN’s larger size and overlapping network with KCS brought greater scrutiny from the STB. The voting trust that preceded the deal was not in the public interest, the regulator said.

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CP’s voting trust has already received STB approval. CP in August raised its offer, and reiterated that it had the only deal that could win approval from the STB.

KCS’s agreement with CP is good news for both Canadian railways, Bank of Nova Scotia analyst Konark Gupta said. CN can focus on improving profitability while CP takes a step toward enhancing its competitive position as a bigger railway, he said.

Meanwhile, CN is facing a battle for its boardroom from a major investor who is unhappy with the railway’s push to buy KCS. TCI Fund Management, CN’s second-biggest investor at more than 5 per cent, has called for a shareholder vote to oust CN’s chairman, CEO and two other directors.

TCI, owned by British billionaire Chris Hohn, said CN should not have risked as much as $2-billion in break-up fees by proceeding with the attempted takeover in the face of opposition from the STB and others.

“The bid for KCS exposed a basic misunderstanding of the railroad industry and regulatory environment,” Mr. Hohn said on Monday. “The board consistently misjudged the STB and displayed flawed decision-making, committing billions of dollars to an ill-conceived pursuit of an unattainable asset. CN should focus on getting better rather than bigger.”

Editor’s note: Canadian Pacific Railway Ltd. will issue 262 million shares to pay for part of the takeover of Kansas City Southern, not 44 million. A Canadian Pacific news release incorrectly stated the number of shares to be issued. The online version of this story has been corrected.

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