Canadian Pacific Railway plans to buy the Dakota, Minnesota & Eastern Railroad Corp. in a deal that could ultimately be worth $2.48 billion US.

CPR said late Tuesday it will pay $1.48 billion US in cash for Sioux Falls, S.D.-based DM&E, which will add more than 4,000 kilometres of track in eight states to its network and boost its access to U.S. Midwest markets for agricultural products, coal and ethanol.

DM&E connects with CPR's existing network at Minneapolis, Winona, Minn., and Chicago.

"The DM&E is a high-quality, growing regional railroad that complements our existing franchise," said Fred Green, the president and CEO of CPR, in a release.

CPR said a payment of $350 million US will become due if the company starts on an expansion project before December 31, 2025. The expansion would see the U.S. firm add about 400 kilometres of track and upgrade another 1,000 kilometres to help haul more coal from Wyoming's coal-rich Powder River Basin.

Calgary-based CPR also said it will pay another $700 million US if specified volumes of coal from the Powder River Basin move via the extension by the end of 2025.

The deal, which is expected to close in 30 to 60 days, is subject to the approval of the U.S. Surface Transportation Board.

Investors were less than enthusiastic following the announcement. CPR shares fell $2.54 to $70.93 on the TSX.

As part of the deal for DM&E, CPR said, it has suspended activity under its current share repurchase program that began in March 2007. CPR has purchased more than 3.2 million shares this year.

CPR also said the DM&E acquisition is expected to boost its earnings in 2008.