CALGARY, Alberta — Canadian Pacific’s proposed acquisition of Kansas Metropolis Southern will unite the 2 smallest Class I railroads and create the one North American system that can function within the U.S., Canada, and Mexico.
The mix of the 12,500-mile CP and 6,700-mile KCS, introduced at this time, is a traditional end-to-end merger: The railways at the moment interchange in Kansas Metropolis, Mo., the one location the place their programs meet.
It will seemingly assist the deal win over U.S. regulators. KCS is exempt from the Floor Transportation Board’s extra stringent Class I merger guidelines that since 2001 have successfully prevented mixtures of the six main programs. The railroads anticipate the merger to realize regulatory approval in 2022.
“My guess is that, regardless of what I’ve thought was a extra interventionist stance, STB approval is probably going, as there may be little to no overlap — and that is the one merger that by itself, as a standalone, may not set off full rail consolidation, as another pairing seemingly would,” says impartial analyst Anthony B. Hatch.
The $25 billion deal ($29 billion together with CP assumption of KCS debt) will allow CP to raised compete in opposition to bigger rival Canadian Nationwide, which has loved three-coast entry because it acquired Illinois Central in 1998. However CP can even lengthen its attain into Mexico, the place KCS cross-border site visitors has been rising by greater than 10% yearly resulting from rising intermodal, automotive, and refined merchandise quantity.
CP additionally beneficial properties entry to the dozen Gulf of Mexico ports that KCS and KCS de Mexico at the moment serve. Final yr CP regained entry to the Atlantic at Saint John, New Brunswick, by means of its acquisition of the Central Maine & Quebec, whose line throughout Maine as soon as was a part of CP’s shortcut from Montreal to the Atlantic.
“This transaction shall be transformative for North America, offering vital optimistic impacts for our respective workers, clients, communities, and shareholders,” stated CP CEO Keith Creel. “It will create the primary U.S.-Mexico-Canada railroad, bringing collectively two railroads which have been keenly targeted on offering high quality service to their clients to unlock the complete potential of their networks. CP and KCS have been the 2 finest performing Class I railroads for the previous three years on a income progress foundation.”
CP and KCS say they are going to launch new intermodal service linking Dallas and Chicago, the place site visitors will be capable of join with current CP service to Jap and Western Canada. CP additionally will get pleasure from lengthy hauls on current site visitors, similar to crude and grain certain for the Gulf Coast and Mexico, that it at the moment palms off to KCS in Kansas Metropolis.
The merger additionally will tie collectively auto manufacturing areas in Canada, Detroit, and Mexico and create new single-line service for autos produced at meeting crops in Mexico which can be certain for shopper markets within the Midwest and Canada. At present about 5% of CP’s auto quantity comes from Mexico, the place auto manufacturing has been rising lately.
Just one% of CP’s general site visitors is cross-border with Mexico. However propane exports from Canada to Mexico have been surging since 2014. Mexico’s consumption of propane is among the many highest on the planet, and its propane manufacturing is declining. CP will get pleasure from lengthy hauls for Mexican-bound propane shipments that originate in Alberta.
The brand new firm, to be known as Canadian Pacific Kansas Metropolis, shall be primarily based in Calgary and headed by Creel, who has prolonged his contract by means of 2026. Kansas Metropolis, present residence to KCS, will function the U.S. headquarters. The system’s Mexico headquarters will stay in Mexico Metropolis and Monterrey, and CP’s present U.S. headquarters in Minneapolis-St. Paul “will stay an essential base of operations,” CP says.
KCS, which connects with all six of the main programs, has been the topic of merger hypothesis for years. Final summer time two infrastructure funds thought of taking the railroad non-public, which prompted hypothesis within the rail business that CP would possibly search to accumulate KCS.
Former KCS CEO Michael R. Haverty — who constructed KCS right into a cross-border system 25 years in the past — says makes an attempt to merge with CP greater than a decade in the past by no means jelled. Fred Inexperienced, who was then CP’s chief govt, feared a deal would spark opposition from Union Pacific, Haverty says.
“I do assume this can be a excellent match,” Haverty says.
Haverty suspects that final yr’s non-public fairness curiosity in KCS sparked consolidation talks with CP.
KCS was a north-south railroad in an east-west world till the North American Free Commerce Settlement was signed in 1992. Haverty noticed the chance to show KCS from a Midwest-Gulf Coast regional right into a cross-border system that would faucet into free commerce. In 1996, KCS gained the 50-year concession to function what was then known as Mexico’s Ferrocarril del Noreste, or Northeast Railroad.
Haverty expects CP-KCS deal to move regulatory muster within the U.S. however says some concessions could also be required in Mexico, the place the federal regulator has change into more and more involved about rail competitors.
Most of KCS’s progress comes from linking manufacturing areas in Mexico with shoppers within the U.S. and Canada, in addition to exporting U.S. grain, U.S. and Canadian auto elements, and refined merchandise to Mexico.
The KCS Worldwide Railway Bridge at Laredo, Texas, is the busiest rail border crossing in North America. KCS already had plans beneath approach so as to add a second span throughout the Rio Grande at Laredo, the place it additionally interchanges with Union Pacific.
The mixed CP and KCS system will stay the smallest Class I by income. However at 19,200 miles CP-KCS is roughly the scale of the 19,500-mile CN.
The railways have scheduled an investor webcast for two p.m. at this time to debate the deal.