Canadian Pacific’s South Kansas City Megadeal is over … Sorta

Tits one-year saga by Kansas City South (NYSE: KSU) find a buyer ended on December 14, when Canadian Pacific Railway (NYSE: CP) has closed its deal to acquire Kansas City shares for $ 31 billion. But what will happen next for the railways is far from clear, and investors must remain vigilant as the next year unfolds.

Kansas City Southern shareholders received $ 90 in cash and 2,884 Canadian Pacific shares for each share they held. As a result, Kansas City Southern no longer trades on the New York Stock Exchange. But the railroad itself won’t come under Canadian Pacific control for at least a year. Instead, operations will be transferred to a special voting trust that is to be independent from Canadian Pacific while regulators decide whether a merger should be authorized.

The convoluted trust structure is tricky at best and could cause real problems for Canadian Pacific until the end of 2022. Here’s what investors need to know about the potential new North American railroad company, and how long. could take until we know if the deal was worth the risk.

A long and winding road

Kansas City Southern took to the streets over a year ago, initially trading with private equity firms. The company is the smallest of North America’s Seven Great Railways, with an attractive route network that runs along the mainland’s spine to a deep-water port in Lazaro Cardenas, Mexico.

Image source: Kansas City South.

The United States imposed a moratorium on major U.S. rail transactions about two decades ago, but Kansas City Southern, due to its size and unique road map, has always been the possible exception to the ban. Last March, Canadian Pacific Railway decided to test regulatory waters, offering $ 275 per share and gaining approval from the Kansas City Southern board of directors.

In an attempt to ease regulatory uncertainty and gain approval from Kansas City Southern, Canadian Pacific has suggested the fiduciary voting structure that is now in place. The trust allows Kansas City Southern shareholders to receive their wages well in advance of a lengthy regulatory approval process. The risk lies with Canadian Pacific, which was forced to pay for the railroad before the regulatory action and could register a loss if the merger is ultimately rejected and it has to resell the asset in the market.

But in May, Kansas City Southern reversed the price, saying that a competing offer of $ 325 per share proposed by Canadian National Railway (NYSE: CNI) was superior. Kansas City Southern returned to Canadian Pacific in September after the U.S. Surface Transportation Board ruled it would allow Canadian Pacific to use the trust structure but not Canadian National, a clear indication that the regulator had serious concerns about combining Kansas City Southern with the bigger Canadian Nationals.

With the trust agreement now in place, Canadian Pacific will await final approval from the Surface Transportation Board. This is unlikely to happen until the second half of 2022 at the earliest.

Investors are still waiting

For Canadian Pacific investors, there is a lot of uncertainty about the way forward. Past rail mergers have been notoriously difficult to integrate, which is part of the reason why a moratorium was in place. Add the risk that comes with an extended review and the one-year deadline for integrating the two companies, and a lot can go wrong from there.

There is reason to believe that the suit, which will be called Canadian Pacific Kansas City Ltd., will be approved. The deal would create a true North American railroad with the ability to move freight from southern Mexico to the Gulf of Mexico, the Midwest and Northeastern United States and all of Canada without having to make a transfer. between carriers. Canadian Pacific and Kansas City Southern were the two smaller major railroads before the deal, a fact that has not escaped regulators.

An overview of the combined routes map, showing the company's reach in Mexico and from the Atlantic to the Pacific across Canada.

Combined road map of southern Kansas City and the Canadian Pacific. Image source: Canadian Pacific Railway.

Assuming the deal is done, the combination, at least on paper, looks powerful. The two railroads have worked together in the past, which should ease the integration process, and the combined road map and scope would make it a formidable competitor, compared to its more geographically limited rivals. But investors interested in participating in this possible hike have a long year of congressional hearings, regulatory grill and economic uncertainty to look forward to, and a few years of integration after that.

It’s good to take a ride on the new Canadian Pacific Railway Kansas City and hope for some exciting times to come. Just know that, even after stocks and cash have been traded this week, we’re still in the early days of what promises to be a long journey.

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Lou Whiteman has no position in the stocks mentioned. The Motley Fool recommends Canada’s National Railways. The Motley Fool has a disclosure policy.

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