Canadian Pacific Railway to buy Kansas City Southern for US$25b

Calgary

CANADIAN Pacific Railway Ltd (CP) agreed to buy Kansas City Southern for US$25 billion, seeking to create a 32,000km rail network linking the US, Mexico and Canada.

Kansas City investors will receive 0.489 of a CP share and US$90 in cash for each share they hold, valuing the stock at US$275 apiece - 23 per cent more than Friday's record close, according to a statement from both companies on Sunday.

The transaction gives CP access to the Kansas City, Missouri-based company's sprawling Midwestern rail network that connects farms in Kansas and Missouri to ports along the Gulf of Mexico.

It would also give it reach to Mexico, which made up almost half of Kansas City Southern's revenue last year, and create the only network that cuts through all three North American countries.

"This transaction will be transformative for North America," CP president and chief executive officer Keith Creel said.

Mr Creel will be CEO of the new company, to be based in Calgary, and is expected to remain at the helm until at least early 2026, according to a separate statement. The combined entity, to be called Canadian Pacific Kansas City, or CPKC, will have revenue of about US$8.7 billion and almost 20,000 employees.

The deal comes as trade across the three nations is expected to pick up under the Biden administration. Just days after his inauguration, US President Joe Biden spoke with the leaders of Canada and Mexico, his first calls with foreign counterparts, where issues from trade to climate change were discussed.

Mexico is a crucial supplier of cars, electronics and food and a major customer of grain, fuel and consumer goods - ties that are likely to be strengthened by July's passage of the US-Mexico-Canada trade pact.

Kansas City's unique network linking Mexico's largest industrial cities and ports to the US Midwest also would be positioned to benefit if the coronavirus pandemic and fraying ties between the US and China prompt companies to move lower-wage manufacturing from Asia to North America.

As part of the transaction, CP will issue 44.5 million new shares, to be financed with cash-on-hand and about US$8.6 billion in debt.

The deal is expected to boost CP's adjusted diluted earnings per share in the first full year after completion, generating double-digit accretion upon the full realisation of synergies thereafter.

Kansas City has been a takeover target before. In September, Dow Jones reported that the company rejected a US$20 billion offer from Blackstone Group Inc and Global Infrastructure Partners. BLOOMBERG