By Dave Sebastian

 

Kansas City Southern has agreed to sell itself to Canadian Pacific Railway Ltd. in a cash-and-stock transaction that gives it a roughly $31 billion enterprise value, including $3.8 billion in debt, after a hotly contested battle for the railroad.

The agreement comes after Kansas City Southern said Canadian Pacific's offer is superior to the one it had accepted from Canadian National Railway Co. The deal values Kansas City Southern at $300 a share, the companies said Wednesday. That represents a 34% premium based on Canadian Pacific's closing price Aug. 9, the date before Canadian Pacific submitted a revised offer, and Kansas City Southern's unaffected closing price March 19, the companies added.

Kansas City Southern shareholders will get 2.884 Canadian Pacific shares and $90 in cash for each Kansas City Southern share held. Preferred shareholders will get $37.50 in cash for each preferred share held, the companies said.

Kansas City Southern shareholders are expected to own 28% of Canadian Pacific's outstanding common shares, the companies said.

The companies said they expect the combined entity to generate about $1 billion in annual savings within three years. They see the deal adding to Canadian Pacific's adjusted earnings per share in the first full year after the acquisition.

To fund the stock consideration of the deal, Canadian Pacific will issue 44.5 million new shares, they said. Canadian Pacific will fund the cash portion through cash on hand and by raising about $8.5 billion in debt, for which financing has been committed. After the closing into a voting trust, Canadian Pacific expects its outstanding debt to be about $20 billion.

Kansas City Southern emerged as a takeover target roughly a year ago when a group of buyout investors approached it. The smallest of the major freight railroads in the U.S., it plays a key role in U.S.-Mexico trade.

Canadian National's bid suffered a major setback Aug. 31, when the Surface Transportation Board, a five-member panel that must bless mergers of freight railroads, ruled the company wouldn't be permitted to complete a deal using a temporary voting trust that was a crucial to part of the offer. The STB ruled that Canadian National hadn't demonstrated the use of a voting trust would be consistent with the public interest.

Canadian National said Wednesday Kansas City Southern will pay it a $700 million termination fee and also pay an additional $700 million in reimbursement for that amount which was previously paid by Canadian National to Kansas City Southern to reimburse a termination fee paid to Canadian Pacific in May.

 

Write to Dave Sebastian at dave.sebastian@wsj.com

 

(END) Dow Jones Newswires

September 15, 2021 10:35 ET (14:35 GMT)

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