Canadian Pacific agrees to buy Kansas City Southern for $29bn

Railway group Canadian Pacific has agreed to buy Kansas City Southern for $28.9bn including debt in the largest takeover deal this year.

The transaction, first reported by the FT, is the biggest in CP’s history and will see it take over the smallest of the seven Class 1 railway operators that dominate a significant share of freight activity in the US.

It marks the latest effort to shake up a structure among the big railroads in the US and Canada that has been unchanged since CSX and Norfolk Southern — the two big operators in the eastern US — took over Conrail and divided it between themselves in 1999.

Keith Creel, CP chief executive, said: “This will create the first US-Mexico-Canada railroad . . . [and combine the] two best performing Class 1 railroads for the past three years on a revenue growth basis.”

The Calgary-based company will pay $275 per share, comprised of $90 in cash and the remainder with its stock. To pay for the deal, CP will issue 44.5m new shares and raise $8.6bn in debt. 

CP’s proposal represents a 23 per cent premium on Kansas City Southern’s closing stock price of $224 at the end of last week. The deal values its equity at $24.9bn before the inclusion of debt.

The two companies notified the Surface Transportation Board, the US freight rail regulator that will need to approve the combination, about the deal on Saturday, people with direct knowledge of the matter said.

Investors have been concerned that any further consolidation would run into problems with the STB. As it stands, there are two competing big operators in Canada (CP and Canadian National), CSX and Norfolk Southern in the eastern US and Union Pacific and BNSF in the west. Kansas City Southern, the smallest Class 1, is the only operator focused on north-south operations.

Kansas City Southern’s performance has been closely tied to trade between the US, Canada and Mexico, with its main routes linking the two countries neighbouring the US. It also has extensive operations in Mexico and owns a 50 per cent stake in the Panama Canal Railway Company.

The railway sector was hit hard in the early phase of the pandemic because of restrictions imposed by the US government to contain the spread of coronavirus.

Prospects have improved over recent months, as the US accelerated its rollout of vaccines and business activity picked up. President Joe Biden’s efforts to strengthen US-Mexico trade relations are expected to further boost railway activity.

Shares of Kansas City Southern have more than doubled in the past year. The company rejected a takeover bid last September from a Blackstone and Global Infrastructure Partners-led consortium that valued its shares at $21bn.

Kansas City Southern reported an 8 per cent drop in revenues in 2020 to $2.6bn and a 23 per cent increase in net income to $617m. It employs about 6,200 staff, according to Capital IQ, compared with nearly 12,000 at the Canadian group.

Shares in CP have climbed 80 per cent over the past year and have a market value of C$63bn ($50bn). The company’s largest shareholder is Chris Hohn’s TCI hedge fund, which had an 8.4 per cent stake, according to filings from the end of last year.

Canadian Pacific previously approached first CSX and then Norfolk Southern about potential mergers in 2014 and 2016 under Hunter Harrison, the charismatic chief executive who had been installed after a campaign by Bill Ackman, the activist investor.

Both bids were rebuffed and there have been no further attempts at mergers since Harrison unexpectedly resigned from CP in January 2017. Harrison joined CSX two months later, shortly before his death in December that year.

This article has been amended to reflect the fact that the Surface Transportation Board has not approved the deal