Railroad Giants To Create First Network Of Its Kind

Canadian Pacific (CP) will buy Kansas City Southern (KSU) in a stock-and-cash deal worth $29 billion. KSU stock gapped up while other railroad stocks were mixed.


The merger agreement announced late Sunday values Kansas City Southern at 275 per share. It would create the first freight-rail network spanning Canada, the U.S. and Mexico.

Kansas City Southern common shareholders will receive 0.489 of Canadian Pacific stock and $90 in cash for each share held. The deal, which includes the assumption of $3.8 billion of outstanding KCS debt, should conclude by the middle of 2022.

The railroad stocks touted increased competition, better service for customers, and potential to foster economic growth on the continent.

The combined company will operate 20,000 miles of rail and generate $8.7 billion in revenue, based on 2020 revenues.

It’s expected to deliver $780 million in synergies over three years. It also should be accretive to Canadian Pacific’s adjusted diluted EPS in the first full year following the acquisition, with double-digit accretion thereafter.

To fund the stock part of the merger, Canadian Pacific will issue 44.5 million new shares. Canadian Pacific Chief Executive Keith Creel will serve as CEO of the new company. It will take on the name Canadian Pacific Kansas City.

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Shares of Kansas City Southern jumped 11% to close at 249.09 while Canadian Pacific fell 5.8% to 356.53, undercutting a 372.66 handle buy point, on the stock market today. Among other railroad stocks, CSX (CSX) rallied 3.3%, Union Pacific (UNP) fell 2.15%, Norfolk Southern (NSC) gained less than 0.1% and BNSF parent Berkshire Hathaway (BRKB) dipped 0.25%.

Kansas City Southern stock cleared a 223.69 flat-base buy point Friday and is now extended after the big Monday gap-up, according to MarketSmith chart analysis.

Following regulatory approval, a single integrated rail system will connect ports on the U.S. Gulf, Atlantic and Pacific coasts with key overseas markets. Trade in grain, automotive, auto parts, energy, intermodal and other shippers should benefit from the combined rail network, the release said.

In a note late Sunday, Baird analyst Garrett Holland called the proposed merger “strategically compelling” and considered deal approval “more likely than not.”

Find Aparna Narayanan on Twitter at @IBD_Aparna.


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