Canadian Pacific Railway’s $29bn Acquisition of Kansas City Southern

By Hannah Farrell, Liam Ryan, Liam Smith (Trinity College Dublin), Ryan Horlick, Christina (Eugene) Lee, Britney Cheng (University of Michigan)

 

Overview of the deal


Acquirer: Canadian Pacific Railway Ltd

Target: Kansas City Southern

Implied Equity Value: $29 billion

Total Transaction Size: $25.2 (-$3.8 billion)

Closed date: H2 of 2021 (expected)

Acquirer advisors: BMO Capital Markets and Goldman Sachs

Target advisors: Bank of America and Morgan Stanley


On the 20th of March, the merger between Canadian Pacific and Kansas City Southern was announced. The merger would result in the first freight-rail network spanning across Canada, the United States, and Mexico. Under the deal, Kansas City Southern common shareholders will receive .489 of Canadian Pacific stock and $90 in cash for each share held, valuing Kansas City Southern at $275 per share. Kansas City Southern shareholders are expected to own 25% of Candian Pacific’s outstanding common shares, and Canadian Pacific will issue 44.5 million shares and raise about $8.6 billion in debt to fund the transaction.


As for some background information on the companies: Canadian Pacific is Canada’s second-largest railroad operator while Kansas City Southern has domestic and international rail operations in North America. The merger is highly complementary, as both companies highlighted the environmental benefits of the deal as it would help shift trucks off highways and subsequently cut emissions. This transaction came into play after multiple failed bids and merger negotiations with several other large networks across the United States. Additionally, this would be the largest deal ever involving two rail companies.


Company Details: (Acquirer - Canadian Pacific Railway Ltd)


Canadian Pacific Railway (CP) is a Canadian Class I railway that provides both rail and intermodal transportation services over a 13,000 mile-long network. The company owns and operates a transcontinental freight railway in Canada and the United States, serving business centers from Montréal, Québec to Vancouver, BC, and the U.S. Northeast and Midwest Regions. CP transports items including bulk commodities, merchandise freight, and intermodal traffic.


Founded in 1881 as the Canadian Pacific Rail Company, headquartered in Calgary, Alberta, Canada

CEO: Keith Creel

Number of employees: 12,000

Market Cap: $47.78B (as of 03/26/2021)

EV: $55.40 billion

LTM Revenue: $6.16B

LTM EBITDA: $3.51B

LTM EV/Revenue: 8.99x

LTM EV/EBITDA: 15.78x


Company Details: (Target - Kansas City Southern)


Kansas City Southern (KCS) is a pure transportation holding company with railroad investments in the United States, Mexico, and Panama. Their rail network includes about 6,700 miles of track in the U.S. and Mexico. Its primary American holding is the Kansas City Southern Railway, a Class I Railroad that operates through 10 states.


Founded in 1887, headquartered in Kansas City, Missouri, United States

CEO: Patrick J. Ottensmeyer

Number of employees: 6,655

Market Cap: $23.06B (as of 27/03/2021)

EV: $27.05B

LTM Revenue: $2.63B

LTM EBITDA: $1.33B

LTM EV/Revenue: 10.27x

LTM EV/EBITDA: 20.31x


Projections and Assumptions

Short-term consequences