Kansas City (NYSE:KSU) Stock Jumps 12% On Canadian Pacific Deal

The stocks of American rail company Kansas City Southern (NYSE:KSU) soared 12 percent early on Monday, March 22, after the Canadian Pacific Railway Ltd. announced to acquire it for $25 billion.

The merger will help create the first freight-rail network connecting Canada, the US, and Mexico. The KSU stock was trading at US$251.71 at 12.40 pm ET, up 12.29 percent.

According to the deal announced over the weekend, the Canadian company will pay Kansas City US$275 a share at a premium of 23 percent from Friday’s close. The transaction would be in a combination of stock and cash, pending approval from the regulators.

If approved, the combined entity, to be named Canadian Pacific Kansas City, will be one of the largest freight carriers in North America, with nearly 20,000-strong workforce and an annual potential revenue generation of about US$8.7 billion. The two companies expect the US Surface Transportation Board, the final authority in the matter, to give its approval by next year.

Although Kansas City is the smallest of the five freight rail companies in the US, it plays a major role in US-Mexico trade. Freight rail services have rebounded amid delivery backlogs after covid. The two rail networks currently connect at a single point in Kansas City where they jointly operate a facility.

This was the third attempt for a merger between the two companies after their unsuccessful bid in 2014 and 2016 amid resistance from various quarters including from regulators. Despite a slowdown in rail freights during covid, Kansas City stock surged 39 percent in the last six months.

Pic Credit: Pixabay.

Canadian Pacific-Kansas City Deal

As part of the plan, Canadian Pacific would create a trust later this year to purchase the Kansas City shares. Kansas City’s management will continue to run the company until the regulator gives its final nod. In the event of a rejection, Canadian Pacific will divest its shares in Kansas City.

The transaction will involve the issuance of 44.5 million new shares as well as raising about $8.6 billion in debt by the Canadian company. It expects to have around $20.2 billion in debt when the deal closes.

Alluding to regulatory issues that may come up, Canadian Pacific Chief Executive Keith Creel said that the absence of rail-line duplication in the merger would minimize potential concerns. On his part, Kansas City CEO Patrick Ottensmeyer said that the new trade agreement between the US, Mexico, and Canada offers a huge opportunity for rail freight as their economies recover.

Mr. Creel reassured the Kansas City staff that there will not be any staff reduction after the merger and its investors would own around 25 percent of the shares in the merged entity.

Last year, Kansas City had rejected an offer from Blackstone Group Inc. and Global Infrastructure Partners to acquire the company for around US$20 billion.