This weekend provided significant news focused on North America rail transport with the announcement that the Canadian Pacific railroad has agreed to merge with the Kansas City Southern railroad for a reported $25 billion.

According to reporting from both The Wall Street Journal and Bloomberg, the combined rail operators would be named Canadian Pacific Kansas City, would be led by the current CEO of CP, would garner upwards of $8.7 billion in combined revenues and employ upwards of 20,000 rail workers. Existing shareholders of Kansas City Southern would reportedly garner a 25 percent equity stake in the combined rail company.  The merger partners expect the deal to result in annual revenue gains or savings amounting to $780 million over three years.

Canadian Pacific merger with Kansas City Southern

The deal has significance from several perspectives.

The deal marks the third attempt by CP to create a transcontinental rail network. In this case, the merger of these two rail carriers would provide shippers a T-shaped network that would span a Southern Canada transcontinental network with that of connecting farms and manufacturing sites from Kansas to Missouri and extend the network into Gulf of Mexico ports along with deep parts of Mexico.  Such a network can provide a more unified rail link for the USMCA trade agreement among Canada, Mexico and the United States.  However, the deal must undergo extensive regulatory approvals and the parties anticipate such approvals to occur be sometime in mid-2022.

Under former CEO Hunter Harrison, CP abandoned pursuits to acquire Norfolk Southern for $30 billion in 2016, and to combine with CSX. In this effort, both rail companies are reportedly more confident of regulatory approval because of the perceived lack of overlap of the two rail operators as well as not reducing shipper options.

The merger of these two rail networks further provides a means for leveraging added sustainability efforts among three nations in reduced emissions and fossil-fuel use, by providing an opportunity for reducing truck movements among these heavily transported trade routes. According to Bloomberg, some 80 percent of production from Mexico based auto plants crosses the border with the U.S. and Canada and has the opportunity to be hauled in a singular movement by rail. A further opportunity is extension of CP’s “precision railroading” scheduling efficiencies to be applied across this broader network with added fuel savings.

 

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