"This company is going to have a North America rail footprint that is truly unmatched," Mr. Ottensmeyer said in an interview. The combined railway could reduce the need for trucks to link production sites and allow cargo to avoid congested California ports.
If approved by regulators, the deal would unite the two smallest of the seven major North American freight carriers, linking factories and ports in Mexico, farms and plants in the Midwestern U.S. and Canada's ocean ports and energy resources.
The transaction will need approval from the U.S. Surface Transportation Board, which requires major railroad combinations to demonstrate they are operating in the public interest by enhancing competition. The merger partners said they expect the STB review to be completed by the middle of 2022.
The combined company, to be renamed Canadian Pacific Kansas City, would have about $8.7 billion in annual revenue and employ nearly 20,000 people. It would be run by Canadian Pacific's Mr. Creel. Kansas City investors would own about 25% of the combined entity's shares. Mr. Creel said there are no plans to reduce staff if the merger is approved.
Mr. Creel said talks were initiated late last year after he called Mr. Ottensmeyer to propose a merger that Kansas City had rebuffed in previous years. At the time Kansas City's board was reviewing overtures from private-equity firms seeking to take it private.
Kansas City in September rejected a takeover bid valued at about $20 billion from Blackstone Group Inc. and Global Infrastructure Partners, The Wall Street Journal reported.
The Kansas City directors ultimately approved Canadian Pacific's offer because shareholders would retain a minority stake in the merged company, people familiar with the matter said.
The companies said Sunday their boards agreed to a deal that values Kansas City at $275 a share in a combination of cash and stock. Kansas City investors will receive 0.489 of a Canadian Pacific share and $90 in cash for each Kansas City common share held.
Kansas City is the smallest major freight railroad in the U.S. but plays a key role in U.S.-Mexico trade. Its network mainly runs up the length of Mexico through Texas to its namesake city
Canadian Pacific has long sought a union with Kansas City to extend its reach into its busy freight routes that stretch from Mexico through southern and Midwestern U.S. states.
Canadian Pacific's major rail lines run across Canada, some northern U.S. states and south to Chicago.
The Canadian railway's leader, Mr. Creel, worked closely with former chief Hunter Harrison, who made a number of unsuccessful overtures to buy Kansas City. Mr. Harrison died in 2017 after taking over and revamping another U.S. operator, CSX Corp.
Railway mergers face significant regulatory hurdles in the U.S. Under Mr. Harrison, Canadian Pacific abandoned a $30 billion pursuit of Norfolk Southern Corp. in 2016 after the STB expressed concern about reduced competition and potential safety issues. Canadian Pacific also made two unsuccessful overtures to combine with CSX, which like Norfolk operates mostly in the eastern U.S.
Kansas City and Canadian Pacific currently have a single point where their two networks connect, in a Kansas City, Mo., facility they jointly operate.
The merger could allow trains traveling north and south to avoid having to interchange cars and potentially bypass Chicago, a busy and often congested hub in the U.S. freight system.
The merger partners said the proposed combination wouldn't reduce choice for customers since there is no overlap between their systems. They said the possibility for single-line routes would shift trucks off U.S. highways, reducing congestion and emissions in the Dallas-to-Chicago corridor.
The combined company's global headquarters would be in Calgary. The U.S. headquarters would be in Kansas City, Mo., while the Mexico headquarters would remain in Mexico City and Monterrey. The proposed deal must also be approved by officials in Mexico.
The Wall Street Journal