Canadian Pacific (CP) Agrees to Take Over Kansas City Southern
In a major development in the railroad space, Canadian Pacific Railway Limited CP reached a merger agreement with Kansas City Southern KSU, under which the former agreed to acquire the latter for approximately $29 billion.
This enterprise value of the cash-and-stock deal includes the assumption of $3.8 billion of outstanding debt of Kansas City Southern. The transaction, which enjoys a unanimous support of the board members of both companies, values Kansas City Southern at $275 per share.
To fund the stock consideration of the transaction, the acquirer will issue 44.5 million new shares. Meanwhile, the cash portion will be funded by a combination of cash-on-hand and raising $8.6 billion debt.
The deal is expected to be accretive to Canadian Pacific’s adjusted earnings per share in the first full year following closure. Subsequently, it is expected to generate double-digit accretion following full realization of synergies.
Two-Step Process in the Run-Up to Deal Completion
However, the deal will be effective only after the completion of a two-step process. The first step will see Canadian Pacific form a “plain vanilla”, an independent voting trust to acquire the shares of the target company. Upon shareholder approval of the transaction and meeting other conditions, Canadian Pacific will acquire the shares and place the same into the voting trust.
Post this action, which is expected in the second half of the current year, shareholders of Kansas City Southern will receive their stipulated portion. Notably, common shareholders of Kansas City Southern will receive 0.489 per Canadian Pacific share in addition to $90 in cash for each Kansas City Southern common stock held.
Under the final step, approval by the U.S. Surface Transportation Board (STB) and other applicable regulatory authorities is needed. The STB is expected to complete its review by the middle of 2022.
Following the fulfillment of these steps, Canadian Pacific’s current CEO Keith Creel will be at the helm of the merged entity, to be known as Canadian Pacific Kansas City. The combined entity will have its global headquarters at Calgary with Kansas City, Mo serving as the U.S. headquarters.
Other Details
The combined entity will intensify competition apart from improving customer service. Moreover, it will drive economic growth in North America by opening up job opportunities and boosting efficiencies among other benefits. The merged entity is anticipated to operate approximately 20,000 miles of rail, employing nearly 20,000 people and generating total revenues of $8.7 billion (based on the 2020 actual revenues).
The conclusion of the deal will lead to establishingthe first rail network connecting the United States, Mexico, and Canada. Notably, the new single-line routes that will be created by the successful culmination of the transaction, are expected to shift trucks off the crowded U.S. highways, thinning highway traffic, curbing emissions and reducing the need for public investments in road and highway bridge repairs. Notably, rail is four times more fuel efficient than trucking and a single train can keep more than 300 trucks off the public roads and discharge 75% less greenhouse gas emissions.
Driven by the precision scheduled railroading models of both companies, the merged entity is likely to result in annualized synergies of approximately $780 million over the next three years.
Zacks Rank & Key Picks
Currently, Kansas City Southern carries a Zacks Rank #2 (Buy) while Canadian Pacific is presently Zack #3 Ranked (Hold). Investors interested in thebroader Zacks Transportation sector may considerTriton International Limited ( TRTN and Herc Holdings HRI, both sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Long-term (three to five years) expected earnings per share growth rate for Triton and Herc Holdings is projected at 10% and 31.2%, respectively.
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Kansas City Southern (KSU) : Free Stock Analysis Report
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