CP and KCS file integration papers

Canadian Pacific Railway Limited and Kansas City Southern have jointly filed a railroad control application with the U.S. Surface Transportation Board (STB) regarding the proposed transaction to create Canadian Pacific Kansas City (CPKC).

The application provides an overview of the proposed operational integration of the CP and KCS rail networks, the impact of that consolidation on the companies’ finances and labour needs, and the anticipated benefits.

“We are excited to file our joint application for this unique, pro-competitive combination and once-in-a-lifetime partnership,” said Keith Creel, CP president and CEO.

“CPKC is an extraordinary opportunity to inject new competition and new capacity into the U.S. rail network, further USMCA trade flows, improve safety, grow employment and facilitate new passenger services. We are ready to work with the STB as the board gives this transaction a thorough and appropriate review, and ultimately look forward to approval so we can get to work delivering these benefits to the North American economy.”

Economic and environmental benefits

The railways suggest that the merger will create more than 1,000 new jobs over the next three years and generate investments in new infrastructure of more than US$275 million.

They also say the deal will prevent more than 1.5 million tons of greenhouse gas (GHG) emissions within five years due to the improved efficiency of CPKC versus current operations, and divert 64,000 long-haul truck shipments to rail annually with new CPKC intermodal services, eliminating another 1.3 million tons of GHG emissions over the next two decades, saving $750 million in highway maintenance costs.

More than 960 stakeholders, including more than 440 shippers, 186 smaller railroads, dozens of public officials, eight major ports, railroad labor unions representing both CP and KCS employees and 289 rail industry suppliers have written letters to the STB supporting CP’s proposed combination with KCS.

The deal

CP has agreed to acquire KCS in a stock and cash transaction representing an enterprise value of approximately $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 percent premium, based on the CP closing price on Aug. 9, 2021, the date prior to which CP submitted a revised offer to acquire KCS, and KCS’s unaffected closing price on March 19, 2021.

The transaction is subject to approval by shareholders of each company along with satisfaction of customary closing conditions, including Mexican regulatory approvals. Shareholders are expected to vote on the transaction later this year.

CP’s ultimate acquisition of control of KCS’s U.S. railways is subject to the approval of the STB. In April 2021, the STB determined it would review the CP-KCS combination under the merger rules in existence prior to 2001 and the waiver granted to KCS in 2001 to exempt it from the 2001 merger rules. In August 2021, the STB reaffirmed that the pre-2001 rules would govern its review of the CP-KCS transaction. On Sept. 30, 2021, the STB confirmed that it has approved the use of a voting trust for the CP-KCS combination.