Creating the first railroad network connecting the U.S., Canada and Mexico, Canadian Pacific Railway Ltd. (CP, Financial) announced a merger with Kansas City Southern (KSU, Financial) on Sunday.
According to the terms of the $25 billion agreement, shareholders of the Kansas City-based railroad will receive 0.489 shares of Canadian Pacific and $90 in cash for each share held. Following the deal's close, they will hold 25% of the company's outstanding shares.
The deal, which has an enterprise value of $29 billion including debt, values Kansas City Southern at $275 per share, a 23% premium to its closing price on March 19. The Canadian rail operator said it will issue 44.5 million new shares and raise about $8.6 billion in debt to fund the transaction.
It is the biggest merger and acquisition deal of 2021 so far.
As North American trade is projected to increase following the implementation of the new U.S.-Mexico-Canada pact in July 2020, the combination of the two companies will benefit customers in the grain, automotive, auto parts, energy and intermodal markets, among others.
In a statement, Canadian Pacific President and CEO Keith Creel noted that it also unites "two railroads that have been keenly focused on providing quality service to their customers to unlock the full potential of their networks."
"The new competition we will inject into the North American transportation market cannot happen soon enough, as the new USMCA Trade Agreement among these three countries makes the efficient integration of the continent's supply chains more important than ever before," he said.
Kansas City Southern President and CEO Patrick Ottensmeyer emphasized the deal will benefit customers as well as employees.
"In combining with CP, customers will have access to new, single-line transportation services that will provide them with the best value for their transportation dollar and a strong competitive alternative to the larger Class 1s," he said. "Importantly, KCS employees will benefit from being part of a truly North American continental enterprise, which creates a strong platform for revenue growth, capital investment, and future job creation."
There will also be some environmental benefits, according to the two CEOs, as the new routes that will be created by the combination are expected to shift trucks off highways. They highlighted that rail is four times more fuel efficient than trucking since one train can replace 300 trucks and produces 75% less greenhouse gas emissions.
"We have been champions for the environment recognizing the important role rail plays in lowering overall transportation emissions," Creel and Ottensmeyer said in a joint statment. "This combination advances our shared science-based pledges in-line with the Paris Agreement to improve fuel efficiency and lower emissions in support of a more sustainable North American supply chain."
Following the close of the transaction, which is expected to occur by the middle of next year, Creel will remain CEO of the combined company while four Kansas City Southern directors will join its board. With its global headquarters remaining in Calgary, the company, which will be renamed Canadian Pacific Kansas City, will have its U.S. operations based out of Kansas City, Missouri and its Mexican operations in Mexico City and Monterrey.
On Monday, shares of Kansas City Southern climbed over 11% to $250.84, while Canadian Pacific's shares were down nearly 5% at $360.02. Over the past year, both stocks have gained more than 75%.
According to GuruFocus Industry Overview, Kansas City Southern is the ninth-largest player in the U.S. transportation sector. Fellow rail operator Union Pacific Corp. (UNP, Financial) is the largest.
As for Canadian Pacific, it is the second-largest player in its sector in Canada behind Canadian National Railway Co. (TSX:CNR, Financial).
Disclosure: No positions.
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