KANSAS CITY — Canadian Pacific Railway has agreed to purchase the Kansas City Southern railroad in a transaction valued at $29 billion. The first US-Canada-Mexico rail network would allow grain companies and other shippers greater efficiency and supply chain integration as trade ramps up due to the passage of the USMCA pact of 2020.
The combined rail company, to be named Canadian Pacific Kansas City, is expected to generate greater competition as it expands to 20,000 miles of rail and 20,000 employees. With expected revenues of about $8.7 billion, the merged rail network will remain the smallest of six Class 1 railroads.
CP and KCS officials called the merger “a game changer” for shippers from the agriculture sector.
“This deal links the origination in production-rich origins that CP has to new export and domestic consumption markets that we simply just can’t get to today,” said John Kenneth Brooks, executive vice president and chief marketing officer of CP in a March 22 conference call with investors. “It gives our corn, our soybean, our wheat, our canola producers and shippers, our grain products of meals and oils and ethanol. All these commodities gain additional domestic markets. They gain routes to the Gulf of Mexico and, of course, into Mexico itself.”
CP and KCS pointed to several examples of increased efficiency upon completion of the merger. Expensive, sometimes lengthy interchange operations could be streamlined at the two rail lines’ sole connection point, a shared facility in Kansas City. Some rail traffic on KCS lines will be able to bypass Chicago, taking an Iowa route instead to reach Upper Midwest and Canadian destinations. That will reduce rail traffic, fuel burn and emissions at the Chicago hub.
Other sustainability improvements could unfold as new single-line routes come online. Significant shipping volumes could move from highways to rails, where one train can keep 300 trucks off public roads, reducing emissions and repairs to roads and bridges, CP said. The company also is developing the first line-haul hydrogen powered locomotive on the continent.
Under the agreement announced March 21 with full support from the boards of directors from each company, CP will purchase KCS in a stock and cash transaction to include assumption of $3.8 billion in KCS debt.
CP is expected to acquire KCS shares in the latter half of 2021 and enter a process of seeking approval from the Surface Transportation Board and other applicable regulatory agencies. An STB review is expected to be completed by mid-2022.
Keith Creel, president and chief executive officer of CP, will retain his CEO role in the merged company.
“This transaction will be transformative for North America, providing significant positive impacts for our respective employees, customers, communities, and shareholders,” Mr. Creel said. “This will create the first US-Mexico-Canada railroad, bringing together two railroads that have been keenly focused on providing quality service to their customers to unlock the full potential of their networks. CP and KCS have been the two best performing Class 1 railroads for the past three years on a revenue growth basis.”
In the nearby, capital expenditures could take a backseat to infrastructure improvements, with some implications for the grain carload commodity group.
“We have our unique kind of hopper strategy that we’ll start anticipating post-2022,” said Nadeem S. Velani, executive VP and chief financial officer at CP. “We’ll see some step down in capital just on the hopper investments that we’ve been taking advantage of investing in, $600 million of hopper cars to support growth in grain and improve the service in grain. Net-net, you’re going to see capital expenditures kind of flat to slightly down, but greater investments in infrastructure.”
CPKS global headquarters are slated for Calgary, with Mexico City and Monterrey continuing as Mexico headquarters. CP intends to move its US headquarters designation to Kansas City from Minneapolis-St. Paul, Minn., though the latter will remain a base of operations.
The roots of the first US-Mexico-Canada rail network extend to KCS’s 1995 partnership with Latin America’s largest integrated transportation company, Transportacion Maritima Mexicana SA de CV, Mexico City. KCS, then a 2,900-mile north-south regional railroad serving the Gulf coast and the US Midwest, sharply outbid Union Pacific for the right to buy 49% of the Texas-Mexican Railway, a 160-mile line that extended from Corpus Christi, Texas, to Laredo, a major US-Mexico truck and rail gateway.
The eastern Texas rail link with the Texas-Mexican Railway allowed KCS to take advantage of the 1994 North American Free Trade Agreement and established the Kansas City Southern as a major rail carrier between Kansas City and Mexico.
KCS continued to expand its US and Mexico network through marketing and access agreements through the 1990s, including a 1998 investment in the Panama Canal Railway Co. (PCRC).
KCS partnered with Grupo TMM, winning Mexico’s Northeast Line rail concession in 1996, which allowed the formation of Transportacion Ferroviaria Mexicana, SA de CV in 1997. KCS became a majority owner when it bought Grupo’s shares in 2004, and full owner upon purchase of the remaining 20% in 2005.
Those maneuvers gave KCS key access to the Mexican market, but rails and equipment in that country and Latin America required serious upgrades. To fund them, KCS spun off all business interests that were not essential to rail, paid off recent acquisitions, and began making capital improvements. Among them were upgrades to allow PCRC tracks to handle large, intermodal shipping containers and passenger trains.
The March 21 announcement came at a time of increased US and Canada rail traffic, but decreased Mexico traffic. Cumulative 2021 US rail traffic by March 13 was 4,980,025 rail cars and intermodal units, a 2.7% year-over-year increase. Canadian rail traffic for the year by that date was 1,500,759 units, up 5.6% from the same period in 2020. Mexico’s 2021 traffic by March 13 was 369,227 units, a 5.8% year-over-year decrease.
Patrick J. Ottensmeyer, president and CEO of KCS, said the deal will benefit shippers and employees.
“KCS has long prided itself in being the most customer-friendly transportation provider in North America,” he said. “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.”