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NORTH AMERICA: Canadian Pacific Railway and Kansas City Southern confirmed on September 15 that they had entered into a definitive merger agreement, under which CP will acquire KCS in a stock and cash transaction valuing the smaller railroad at approximately US$31bn.

KCS had given notice to Canadian National on September 12 that it intended to terminate its proposed US$33·8bn merger with CN, after the US Surface Transportation Board rejected an application KCS to be put into a voting trust pending completion of the regulatory approval process.

STB had earlier agreed in principle to a voting trust for a smaller CP-KCS merger, and the KCS board determined that CP’s revised offer announced on August 9 therefore represented a ‘Company Superior Proposal’.

Under the terms of the agreement, CN had five working days to make an improved offer. However, CN agreed to an early termination of the match period, noting on September 15 that ‘significant changes to the US regulatory landscape’ had ‘made completing any Class I merger much less certain’, including the Executive Order on competition issued by President Biden in July.

KCS has agreed to pay CN a US$700m termination fee, as well as refunding the US$700m which CN had paid for KCS to terminate its previous merger agreement with CP.

34% premium

The CP-KCS transaction, which has the unanimous support of both boards, values KCS at US$300 per share, representing a 34% premium on the share price on March 19.

Following the closing into a voting trust, KCS common shareholders will receive 2·884 CP shares and US$90 in cash per share, while preferred shareholders will receive US$37·50 in cash. This would give the KCS common shareholders a 28% stake in CP, and ‘the ability to participate in the upside of both companies’ growth opportunities’, as well as annualised synergies valued at approximately US$1bn over three years. The combination is expected to be accretive to CPs adjusted diluted earnings per share in the first full year following CP’s acquisition of control of KCS, and to generate double-digit accretion upon the full realisation of synergies.

To fund the deal, CP will issue 44·5 million new shares and raise US$8·5bn in debt. With the assumption of US$3·8bn of KCS debt, this would give the combined railroad an outstanding debt of approximately US$20bn.

The combined company would still be the smallest of the six US Class I railroads by revenue, with a turnover of approximately US$8·7bn based on 2020 financial reports. It would have a network of roundly 33 000 route-km and employ 20 000 people.

Historic agreement

‘Our path to this historic agreement only reinforces our conviction in this once-in-a-lifetime partnership’, said CP President & Chief Executive Officer Keith Creel. ‘This perfect end-to-end combination creates the first US-Mexico-Canada rail network with new single-line offerings that will deliver dramatically expanded market reach.’

‘We are glad to be partnering with CP’, confirmed KCS President & Chief Executive Officer Patrick Ottensmeyer. He believed that a CP-KCS combination would enable the railroad ‘to become part of a growing and truly North American continental enterprise’.

‘While we are disappointed that we will not be able to deliver the many compelling benefits of this transaction to our stakeholders, the decision to bid for KCS was a bold and strategic move that still resulted in positive outcomes’, commented CN President & Chief Executive Officer JJ Ruest. ‘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. CN will continue to pursue profitable growth and opportunities for excellence as a leading Class I railroad.’

Merger timetable

Speaking to investors and analysts on September 16, Creel and Ottensmeyer confirmed that they expected to file their merger application with STB by mid-October, requesting a 10-month review under the pre-2001 merger rules. This could see the merger approved by November 2022. Mexican regulators are expected to complete their review in the next four months.

CP and KCS shareholders will vote on the merger package in December. Assuming that it is approved, KCS would be put into the voting trust during the first quarter of 2022, allowing stockholders to receive their payments. Former KCS CEO David Starling is expected to act as independent trustee, overseeing the railway’s current management who would continue to run the business pending regulatory approval.