On Friday, railroad history will be made (in a good way).
Canadian Pacific (CP) and Kansas City Southern are combining.
It’s the first major railroad merger in over two decades. And it’s likely to be the last major change to the North American rail industry for many years to come.
The deal, which combines the continent’s two smallest Class I railroads almost didn’t happen.
But then government regulators stepped in.
They let the merger go through while blocking bids from larger competitors.
It’s almost a miracle, considering how much scrutiny government agencies have been putting on corporate mergers. The last few years have been filled with numerous antitrust cases and investigations.
It’s apparent that government officials support the combination.
Here at the Intelligent Income Daily, we’re focused on finding the safest income investments on the market. When the government is bending over backwards to support something, we take notice.
Today I want to tell you the story behind the historic merger of Canadian Pacific and Kansas City Southern and explain why this new rail network will help create and bring jobs back to the U.S.
To Merge or Not to Merge
As I’ve explained before, railroads are one of the widest moat investments on the market. That’s because transportation by rail is the most efficient solution when it comes to moving goods over long distances.
And in North America, the railroads are dominated by just a handful of Class I rail carriers who transport the majority of goods across the continent. Now, that small list is getting even smaller.
Canadian Pacific first approached Kansas City Southern about a merger in early 2021.
The two companies were the smallest major railroads in North America.
Canadian Pacific’s network ran across Canada and extended into several Midwestern states. Kansas City Southern, on the other hand, had lines running northward from Mexico through Texas, Oklahoma, and Kansas. The two networks had no overlap and connected at just one point: Kansas City.
Source: Future for Freight
Strategically, the combination made a lot of sense. In addition to gaining scale and operating leverage from running a larger business, combining the two companies would create the only rail network that could provide transportation across all three North American countries.
Plus, it would connect to major ports on the Atlantic, Pacific, and Gulf Coasts.
Kansas City Southern had accepted Canadian Pacific’s offer.
But weeks later, Canadian National Railway (CNI) made a much higher bid for Kansas City Southern, even offering to pay the break-up fee for canceling its previous deal.
Kansas City Southern pivoted and accepted the better offer instead.
Months later, regulators from the Surface Transportation Board (STB) blocked the deal. They’re the agency in charge of managing railroad rate and service issues. The STB determined that allowing the Canadian National deal to go through was not in the public interest.
So Kansas City Southern went back to Canadian Pacific, which was still willing to buy it. The companies completed the stock portion of their transaction in late 2021.
But, the STB had still not given their final approval for the merger. For the past year, the two railroads have still been operating as separate companies in case the combination was ultimately rejected.
Finally, last month, the STB gave the green light for the merger to proceed. The companies will make it official this Friday, April 14 and begin the long process of integrating the two networks over the next three years.
Canadian Pacific plans to invest more than $275 million towards improving rail safety and capacity. This is especially important given all the news stories we’ve seen about train derailments recently.
Although the new Canadian Pacific-Kansas City railroad will be much larger than its predecessors, it will still be the smallest Class I railroad in North America.
But it will be much better positioned to compete with its larger rivals like Canadian National Railway.
As Canadian Pacific unlocks synergies from its merger, its earnings per share is expected to increase by about 20% each year over the next 3 years.
The new company is expected to add more than 800 union jobs directly.
And the newly combined network will allow new routes, making way for 64,000 truckloads of goods to shift to rail transportation each year, reducing congestion and lowering prices.
This will also make American manufacturing more competitive, particularly in industries like automobiles and electronics.
It’s just one piece of the puzzle that will help bring back jobs to the U.S. in a major “reshoring” trend.
Stay tuned as we explore more on how things are being “Made in America” again in the coming weeks and months.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily
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