CP to Acquire Kansas City Southern for $25 Billion, Create Extensive North American Nework

Canadian Pacific Railway and Kansas City Southern Railway will merge as part of a $25 billion deal that will create a rail freight network that spans Canada to Mexico, the two carriers announced on Sunday.

Supply Chain Digest Says...   In a name that has about zero chance of lasting long, the new railway will be called Canadian Pacific Kansas City to start. What do you say? Click here to send us your comments Click here to see reader feedback

Canadian Pacific will also assume $4 billion of Kansas City Southern's debt. The agreement will require regulatory review and eventually approval from the Surface Transportation Board, a process that could take a year and is not a certaintly.

Kansas City Southern is the smallest of the five Class I US rail carriers, but it is the only one with operations in Mexico, running north-south through Texas and to its Missouri home. Canadian Pacific has long sought a partnership with Kansas City Southern so it can extend its existing rail network further south.

This is Canadian Pacific's third attempt to acquire a major US rail carrier, hoping to create a true transcontinental rail network. Canadian Pacific abandoned the two prior efforts in 2014 and 2016 to acquire CSX and then Norfolk Southern after resistance from each takeover target, in addition to opposition from rivals, shippers and US regulators.

The proposed takeover is the largest industry deal in decades, and would create a "compelling U.S.-Mexico-Canada rail network," according to a Baird Equity Research report.

"The proposed combination would create the first US-Mexico-Canada rail network connecting ports on the US Gulf, Atlantic and Pacific coasts and offering single-line hauls across the continent," Baird analysts added.

"Given the limited franchise overlap (Kansas City, Missouri, is the single point of connection) and current interpretation of the STB's governing rules, we think deal approval is more likely than not," the Baird report says.

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The rail companies would join their networks in Kansas City, giving shippers access to Canada, the US Midwest, the US Northeast, the South Central United States and Mexico. The interchange point in Kansas City could remove a roadblock, speeding up shipments by allowing some cargo to remain on the same car. Currently, cargo being transported from one rival's network to another may have to be swapped out to a new car to continue on its journey.

In a name that has about zero chance of lasting long, the new railway will be called Canadian Pacific Kansas City to start. The combined company would operate 20,000 miles of rail, employing nearly 20,000 people and generating annual sales of about $8.7 billion.

"The new competition we will inject into the North American transportation market cannot happen soon enough, as the new USMCA Trade Agreement among these three countries makes the efficient integration of the continent's supply chains more important than ever before," said Canadian Pacific CEO Keith Creel, in a statement.

The two companies say the proposed combination wouldn't reduce choice for customers because there is no overlap between their networks. They said the possibility for single-line routes would shift trucks off US highways, reducing congestion and emissions in the Dallas-to-Chicago corridor.

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