Canadian Pacific Kansas City: First Single-Line Rail Network Linking U.S.-Mexico-Canada

Canadian Pacific Railway Limited (TSX: CP, NYSE: CP) (“CP”) and Kansas City Southern (NYSE: KSU) (“KCS”) announced they have entered into a merger agreement, under which CP has agreed to acquire KCS in a stock and cash transaction representing an enterprise value of approximately USD$31 billion, which includes the assumption of $3.8 billion of outstanding KCS debt. The transaction, which has the unanimous support of both boards of directors, values KCS at $300 per share, representing a 34% premium, based on the CP closing price on Aug. 9, 2021. The combined entity will be named Canadian Pacific Kansas City (“CPKC”).

Investment Considerations

According to KCS investment presentation, the deal is expected to create almost USD 800 million by mid-2022 in synergies and USD 600 million in EBITDA thanks to a combination of lower G&A costs, higher fuel efficiency, PP&E, and additional network. Lastly, growth opportunities are a consequence of the huge increase in single-line routes which enable a wider market reach.

Railroads industry market

The merger was pursued to expand the competitive options for customers. In addition, the deal supports and signals potential growth ahead since the two railways companies with the highest revenue CAGR in the next 3 years were brought together. Moreover, the two companies combined will have approximately 20,000 miles of railway, an essential asset considering the 4.3% projected CAGR of the rail transportation market from 2021 to 2028.

The deal

The merger which was carried out thanks to a combination of stock and cash transactions, helped both companies to improve their diversification as the new company is now present in the whole North America region and has a more balanced business diversification across the bulk, intermodal, and merchandise segments.

Conclusions

This merging created an opportunity to create the first single-line railway linking Canada, the United States and Mexico. Kansas City Southern common shareholders are expected to own 28% of CP’s outstanding shares, payed at a 34% premium. As CP president and CEO, Keith Creel, said, “CPKC will become the backbone connecting our customers to new markets, enhancing competition in the U.S. rail network, and driving economic growth across North America while delivering significant environmental benefits”.

Read and download the full report here

Authors: Rebecca Ballarino, Daniela Petteruti, Luca Failla

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