What Investors Need to Know About the Canadian Pacific-Kansas City Southern Deal

Of all the major mergers and acquisitions to emerge from 2021, few have been fraught with as much drama as Canadian Pacific Railway‘s (NYSE:CP) purchase of Kansas City Southern. In this segment of Backstage Pass, recorded on Dec. 17, Fool contributors Toby Bordelon, Lou Whiteman, and Travis Hoium discuss the key highlights of the deal for investors. 

Toby Bordelon: Our first deal, let’s go with Lou. Do you want to start us off?

Lou Whiteman: Sure.

Bordelon: One that was really … is “fun” the right word? I don’t know.

Whiteman: Yeah. This is your past life speaking, right Toby?

Bordelon: Yeah.

Whiteman: It would’ve been fun for the lawyers involved.

Bordelon: It would have been fun. Yeah. And Lou, I know we talked about this a couple of times before. It was so fun for me just to follow your thoughts on this. Give us a quick rundown on this one.

Whiteman: Yes. We had this year, our first major North American railroad merger of the century, and likely our last. There are seven big railroads in North America. They were forbidden from merging anymore by the United States government in 1999 because they were so bad at it, basically.

The two smallest decided, “Let’s give this a go” — Canadian Pacific and Kansas City Southern. They announced their engagement. Canadian National came in, stole the show, took over, and struck a deal to merge with Kansas City Southern.

And then, regulators put the kibosh on that. Just last week actually, the deal closed — sorta. It is $30 billion, and that would be the biggest deal of the year.

Here’s the funny thing about it.

First of all, let’s talk about the pros — and I will go real quick with the screen. This is truly a NAFTA railroad, going all the way from a deep-water port in southern Mexico that can bypass all that congestion in L.A., all the way up through to the East and West Coast, even New York City.

This is a dream come true. This is a one-stop-shop. It is, as I say, probably the only chance to ever consolidate railroads again.

The downside: Because this was such a tough sell, Canadian Pacific Group agreed to pay shareholders of the seller, Kansas City Southern, before it received regulatory approval. So they just wrote a check for $30 billion. The assets of the railroad have gone into a trust where Canadian Pacific cannot touch them, legally, and there they will stay for a year, possibly longer, while this is figured out by regulators.

If it doesn’t go through — frankly, I think it will, but if it doesn’t go through — Canadian Pacific is going to have to sell that back onto the market at a substantial discount, probably, because they bought the stupid thing for 2X its highest price in history. Plus, even in the best-case scenario, it goes through, we’re not starting this integration for at least a year.

I think this is an amazing deal if it all works out, and it will create … it’ll be two also-rans becoming the premier North American railroad. I would’ve put it No. 1 on that, if not for all of the risk, all the uncertainty, and all of the chaos it’s causing, which I do think this will pay off for investors, if they get it right.

But investors should be in no rush to come in, and there’s a lot that could go wrong from here to there. That’s the story of, I think, the biggest deal of the year, wasn’t it? Is anything on this list bigger than $30 billion?

Bordelon: I don’t think so. 

Travis Hoium: You got me by $1 billion. [laughs].

Whiteman: Just real quick, it also produced the worst headline on Fool.com all year, because, yes, “Sorta” was in there. [laughs] So there you go. That’s how we’re putting it now. That’s how it was.

Bordelon: Awesome. Thanks. Yeah. I love this one because of the drama. There was so much drama here. We talked about it multiple times. It seems we had a string going, Lou, where we will be doing this in the Industrials show, and every week, something new, like someone would raise their bid, and it was just ridiculous. I love paying before regulators actually say yes. Here’s $30 billion, which may or may not actually happen.

Whiteman: But when Canadians fight, we all win. [laughs]

Bordelon: Nice. Love it. Thanks, Lou.