The agreement comes after KCS abandoned a higher offer due to regulatory concerns.
This ends a month-long pursuit of the US rail company by CP and Canadian National (CN).
The latest deal by CP values each KCS share at $300, which is higher than CP’s original offer of $275 per share. It includes the assumption of $3.8bn of outstanding KCS debt.
In May, CN made a higher offer of $325 per share, thwarting CP’s bid. CP improved its offer in August but it was rejected by KCS.
However, CN’s offer was rejected by the US Surface Transportation Board (STB) based on the deal’s structure.
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CN’s proposal for a voting trust to buy out KCS shareholders while full approval was still pending was turned down by STB, while CP’s proposed voting trust was approved by the STB.
Recently conceding that CP’s proposal was superior, KCS gave CN five business days to improve its bid. CN refused to comply, citing regulatory roadblocks.
Adding to it was pressure from major investor TCI Fund Management, who wanted CN to ditch its effort to buy the US railroad.
CN is now entitled to a $1.4bn termination fee, consisting of a breakup fee of $700m and a further $700m it had paid the US railroad for rejecting the CP deal.
This deal is expected to be completed next year, subject to final approvals.
The combined group will be called Canadian Pacific Kansas City (CPKC), with Calgary being its global headquarters and Kansas City, Missouri its US headquarters.
The CP-KCS combination will include nearly 32,186km of rail, creating the first single-line rail network connecting US-Mexico-Canada.
According to the companies, the CP-KCS combination would ‘provide unprecedented reach via new single-line hauls across a combined network’.
The new single-line is said to offer competitive options for domestic intermodal shipments between Mexico, the US Midwest, and Canada.
Furthermore, the CP-KCS amalgamation would keep the six-railroad structure of the North American Class 1 rail network, including two in the west, two in the east, and two in Canada, each with access to the US Gulf Coast.
The merged entity would still be the smallest of the Class 1 carriers, while consolidation with CN would have created the third-largest on the continent.
CP president and CEO Keith Creel said: “We are excited to get to work bringing these two railroads together. By combining, we will unlock the full potential of our networks and our people while providing industry-best service for our customers.
“This perfect end-to-end combination creates the first US-Mexico-Canada rail network with new single-line offerings that will deliver dramatically expanded market reach for CP and KCS customers, provide new competitive transportation options, and support North American economic growth.”