S&P Global: Kansas City Southern outlook revised to positive on renewed merger agreement with Canadian Pacific Railway

• Freight railroad operator Kansas City Southern (KCS) has re-entered into an agreement to be acquired by Canadian Pacific Railway Ltd. (CP; BBB+/Stable/--). The agreement followed its termination of a merger agreement with Canadian National Railway Co. (CN; A/Negative/A-1).
  
• We currently expect to maintain our 'BBB+' issuer credit rating on CP and believe the combined entity will have a significantly larger and more diverse route network following the transaction.
  
• Therefore, we revised our outlook on KCS to positive from stable and affirmed our 'BBB' issuer credit rating.
  
• Nonetheless, we also believe the transaction will face significant regulatory review and will not fully close until the second half of 2022.
  
• The positive outlook on KCS reflects our expectation that our rating on CP will not change over the next two years, even with incremental debt associated with the proposed merger.
  

NEW YORK (S&P Global Ratings) Sept. 30, 2021—S&P Global Ratings today took the rating actions listed above.

We expect our rating on CP will remain unchanged.

Following the U.S. Surface Transportation Board's (STB) rejection of CN's use of a voting trust in its merger, KCS terminated the merger agreement and entered into a new agreement with CP. The revised agreement values KCS at approximately $31 billion, higher than the $29 billion valuation under the initial deal. However, we do not believe incremental debt associated with the transaction will lead to a downgrade of our ratings on CP. Therefore, absent a change in our view of our ratings on CP, we would likely upgrade our ratings on KCS in conjunction with the merger.

We believe the combined company's competitive position will be somewhat stronger than KCS' on a stand-alone basis. The combined rail network will be comparable in size to its peers operating in the eastern U.S. The company would also benefit from improved geographic diversification, with operations across southern Canada, the Midwest and south-central U.S., and Mexico.

The positive outlook reflects our expectation that our rating on CP will not change over the next two years, even with incremental debt associated with the proposed merger. We also believe KCS' scale will expand materially following its merger with CP. However, we expect the transaction will face significant regulatory review and will not fully close until the second half of 2022.

We could raise our rating on KCS to that of CP over the next two years if:

• The company successfully completes its merger; or
  
• The company receives all material approvals and we expect the transaction to close imminently.
  
• In addition, we could place our ratings on CreditWatch with positive implications if we believe the likelihood of a merger is sufficiently high and a closure is likely to take place within several months.
  

We could revise our outlook to stable over the next two years if:

• We no longer believe the merger is likely to occur;
  
• It becomes subject to certain conditions we do not currently anticipate; or
  
• We lower the rating or indicate we expect to lower our rating on CP.