FILE - The Canadian Pacific railyard is pictured in Port Coquitlam, British Columbia, Feb. 15, 2015.
FILE - The Canadian Pacific railyard is pictured in Port Coquitlam, British Columbia, Feb. 15, 2015.

Canadian Pacific Railway on Sunday said it has agreed to buy Kansas City Southern for $25 billion in a deal to create the first rail network connecting the United States, Mexico and Canada, betting on an increase in North American trade.

The cash-and-shares deal would create the first U.S.-Mexico-Canada railroad, offering a single integrated rail system connecting ports on the U.S. Gulf, Atlantic and Pacific coasts with overseas markets.

The deal is contingent on the U.S. Surface Transportation Board (STB) blessing the transaction and Canadian railroad operators' previous attempts to buy U.S. rail companies have met limited success.

"I'm not going to speculate about the STB rejecting," Canadian Pacific Chief Executive Keith Creel told Reuters in an interview. But he said based on the facts of the case, including that the two railroads currently have no overlap in their network, he expects regulators to approve it. The STB review is expected to be complete by mid-2022.

It is the top merger and acquisition deal announced in 2021 and the biggest merger involving two rail companies, though it ranks behind Berkshire Hathaway's purchase of BNSF in 2010 for $26.4 billion.  

Creel said in a statement that the new competition the deal would inject into the North American transportation market "cannot happen soon enough," as the new USMCA Trade Agreement makes the efficient integration of the continent's supply chains more important than ever before.

The new and modernized U.S.-Mexico-Canada trade pact took effect in July of last year, replacing the earlier deal that lasted 26 years, and is expected to foster manufacturing and agriculture trade activities among the three countries.

"It gives us certainty given that the USMCA trade deal was resolved," Creel added.

Creel will continue to serve as CEO of the combined company, which will be headquartered in Calgary, the statement said.

The KCS board has approved the bid.

The companies also highlighted the environmental benefits of the deal, saying the new single-line routes that would be created by the combination are expected to shift trucks off crowded U.S. highways, and cut emissions.

Rail is four times more fuel efficient than trucking, and one train can keep more than 300 trucks off public roads and produce 75% fewer greenhouse gas emissions, the companies said in the statement.

Calgary-based Canadian Pacific is Canada's No. 2 railroad operator, behind Canadian National Railway Co Ltd, with a market value of $50.6 billion.

Kansas City Southern has domestic and international rail operations in North America, focused on the north-south freight corridor connecting commercial and industrial markets in the central United States with industrial cities in Mexico.