Canadian Pacific’s Merger With Kansas City Southern Gets Green Light From STB

The U.S. Surface Transportation Board announced that it has approved the merger of Canadian Pacific and Kansas City Southern. CP bought KCS in December 2021 for an implied enterprise value near $31 billion but placed the shares into a voting trust (with KCS run independently) pending regulatory approval. We’d been expecting STB approval, but there was incremental uncertainty recently, given political pushback on the deal following Norfolk Southern’s East Palestine derailment. The press release said CP is reviewing the decision and “in the coming days will announce its plans with respect to the creation of CPKC [Canadian Pacific Kansas City],” but we expect the rail to take control of KCS on or around April 14, when permitted.

The STB did not grant rival Canadian National’s CNR request that CP sell KCS’ line from Kansas City, Missouri, to Springfield, Illinois, as a condition of the merger. However, it did stipulate several conditions that are partly intended to preserve existing rail service options, particularly at interchange points between CPKC and other railroads. For example, it sounds as if the STB has made it easier for shippers to challenge rate increases at certain gateways. Additionally, the STB is requiring that the merger operations remain subject to close regulatory oversight for seven years, including various reporting requirements. While a few of these conditions may not be ideal, we don’t think any are severe enough to derail the transaction.

We are maintaining our $68 fair value estimate for the U.S. shares as the impact of the acquisition is already baked into our model; KCS equity income reflects our forecasts for KCS adjusted net income and anticipated deal synergies. Of note, management expects the merger to yield roughly $1 billion in annualized EBITDA within three years of regulatory approval. Most of that will stem from revenue opportunities, with the rest from cost improvements. Our model assumes the firm achieves 90% of anticipated synergies.