Then why aren't any of the bigger class ones going after it? In particular, why would CP express interest in CSX and then NS and then, after encountering pushback from both roads, backoff and pronounce that repurchasing some of their own CP shares might be a better idea?
It has often been stated, on this forum and elsewhere, that a CP-KCS merger would be a natural fit. Yet for some reason HH and his team have expressed no interest in that direction. A CP-KCS merger would give CP (and KCS) a true competitve advantage as North America's only railroad with substantial holdings in all three NAFTA countries. By contrast, a CP NS merger (or CP CSX merger) would create a crooked transcontinental network, with ports on the US east coast and on the west coast of Canada. No obvious syergies there although CP's principals have stated that such a merger would result in efficiencies for both parties. And the newer tougher rules regarding proposed mergers between class 1s don't apply to KCS, so going after KCS would therefore involve overcoming fewer regulatory hurdles.
I think the folks stating that CP+KCS would be a perfect fit are doing that primarily on the basis of looking at a map. On paper it seems to fit. But even if the lines connect seamlessly, that is of little value of the if the two traffic flows do not interact. Another factor for CP is that they are already having to deal with the regulatory and accounting complications of doing business in two countries. Adding Mexico will make it even more complex.
Perhaps the opportunities for CEO enrichment from that merger are not as attractive. In my experience most talk about synergies and unlocking value for shareholders and blah blah blah are just phrases to make Wall St analysts happy, or at least quiet. CEO enrichment is the name of the game and board members are chosen carefully to further that end.
Dave Nelson
Consider the railroads in terms of them being a herd of animals in western North America before European settlement. The herd is followed by various packs of carnivorities on alert for sick or weak animals on which to prey.
Between historic under performance, the near collapse of the coal industry and a change of executives, NS got caught in a bad point in time and the pack closed in. Fittingly, they are led by a Hunter!
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With respect to KSU, it's high P/E ratio had made it a very expensive acquisition for most of the rest of the industry in anything resembling a stock for stock exchange. At a 14.8 P/E KSU is the second highest of the six large independent rails at this point in time, and normally it has been the highest.
Additionally, the US and Canadian understanding of the rule of law is slightly different than Mexico's, and there is a degree of political risk present in KSU greater than the other six rails.
For a while now including in a long past TRAINS Magazine article, the management of KCS wants to remain independent vs seeking a merger. I believe it is one reason why they carry such heavy debt and why they were so interested in expanding to Mexico (increasing in size).
One alternate reason why nobody has taken them over or hasn't tried beyond the heavy debt load, was the KCS route structure was replicated by lots of other small railroads that were far easier to acquire.......two come to mind immediately....KATY & FRISCO...(split by the two large Western Railroads already).
In 2015 Mexico became the United States' largest trading partner, surpassing American trade with Canada for the first time in history. Canadian trade with Mexico is also on the upswing..
I don't think trade complications across NAFTA borders pose much of a barrier. I represent a small carrier, and we regularly operate in all three countries without too much difficulty. There's a bit of added paperwork and knowing a little Spanish helps.. but you cross three times and you're a pro after that.
The answer to your question is in the IF part. Simply put KCS is not a great catch.
As Dakota pointed out its P/E ratio is high relative to UP, NS, and CSX, but no so far out of line as it was a while back, and there is political risk associated with Mexico. Milwaukee's point that debt is relatively high also inhibits buyers since they would assume that debt as well. In short KCS looks too expensive for what a buyer would get.
KCS is down 39% over the past year. NS down 35%, CSX down 36%, UP down 42%. The Mexican port that has generated so much hot air is really not all that big and will probably be more hard hit than others when the Panama Canal is enlarged.
Of course none of us has any idea about traffic diversion. In short there is more risk than reward in KCS for the larger carriers.
Mac
Somewhat related, you might be interested in Fred Frailey's comments about KCS a couple of years ago:
http://cs.trains.com/trn/b/fred-frailey/archive/2013/05/21/is-kcs-buyable-and-by-who.aspx
http://cs.trains.com/trn/b/fred-frailey/archive/2013/05/22/kcs-part-ii-the-minnow-can-swallow-a-whale.aspx
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"A stranger's just a friend you ain't met yet." --- Dave Gardner
CMStPnPincluding in a long past TRAINS Magazine article,
Was that the editorial piece written by Larry Kaufman?
Convicted OneWas that the editorial piece written by Larry Kaufman?
No it was a feature article with KCS, CEO at the time Haverty or something like that was his last name. He stated pretty clearly KCS was not interested at all in merging with anyone and wanted to remain independent. I look at their acquisitions and high debt levels and to me it looks like they have a ongoing poison pill defense to prevent it. They are so cash poor they cannot even afford to upgrade their tracks when they can benefit from faster service. Hence the NS agreement to pay for upgrades on the Meridian, MS to Dallas Line so they could speed up intermodal trains.
It was a surprise when they relaid the ex-SP track in South Texas but I have to admit a bigger surprise they did not fix that corridor more and rehab more track.....simple answer is they could not afford it.
IMV, KCS has significant debt reduction and track improvement to accomplish before a large carrier would be interested. They should upgrade the rest of the Dallas to Meridian, MS line. Track East of Dallas is in pretty crappy shape, track in some of Dallas Eastern Suburbs is not very good either. ex-ATSF Texas Chief cutoff Track between Dallas and Ft. Worth also could use some upgrades for faster speeds........they just do not have the money though or else they have higher priorities to spend money on the Mexican purchase to get it back in shape.
During the Iraq and Afghanistan Wars, seemed like KCS had exclusive rights to haul the military equipment from Ft. Hood East over the Meridian speedway......it was a lot of traffic for them.........still though, no interest by KCS in using that revenue to improve that line all that much. Opportunity missed.
Regarding "Opportunity missed," I think instead a good business decision. Consider: if I'm KCS, and control a 1,300-mile haul stretching from, say, San Luis Potosi, Mexico to Kansas City, MO on my own rails (mostly; I think KCS uses trackage rights to get through/around Houston), and I participate in (let's say) a 900-mile haul from El Paso, TX (Ft. Bliss) to Vicksburg, MS, maybe 400 miles of which are on my tracks, guess which haul provides me with greater revenue? With limited (scarce) capital to employ/invest in my plant, which toute gets the lion's share? Spending big bucks for the line between Ft Worth (or wherever their connection is with UP on the Ft. Bliss traffic) would be like Conrail spending huge bucks to upgrade freight routes through Alexandria, VA (Potomac Yard) instead of east-west corridors connecting North Jersey with Chicago, or maybe BNSF spending big bucks on the line through Raton Pass at the expense of their southern Transcon. No doubt the military traffic provided a hugh revenue windfall, but investment in roadway is measured in years, not months, and the desert conflicts have both proven to be EXTREMELY short-lived.
But hey! I'm just a bumpkin from Virginia, and I don't know anyone who works for KCS, so all you have is one fan's opinion...
Still though, direct access to Mexico via KCS would be a better deal than a mostly useless transcontinental gig that cuts diagonally across the continent from Charleston, SC to Vancouver, BC. How many shippers in SC, MD, VA etc need volume service to AB and BC? Two...maybe four? Contrast that with MX which is on fire with both raw materials such oil and manufacturing bound for points all over the United States and Canada. And talk about a simple route structure.. KCS would be simple and easy to manage compared to a massive nightmare of shorthauls like CSX and NS..
I like Dakguy's point above, so diplomatically put, about Mexico's "understanding of the rule of law" sometimes being at variance with that in the U.S. and Canada. Already, with KCS's lease having years to run, there have been rumbles out of Mexico's legislature about fiddling with the terms unilaterally.
I'll admit I'm one whose first source is maps when building railroad empires. On paper, CP-KCS looks so good -- balancing CP with CN north-south and then some. Probably one of the reasons I'm sitting in a rocking chair, beside a quiet phone, instead of in a CEO's.
On another subject: The reason I didn't just copy Dakguy's post is that for the past two days I haven't been able to move another's copy within my own post for the sake of editing. Anyone else with this problem?
Ulrich's point about a route structure of a NS/CP combination not making much economic sense is right on point. How much traffic is there between the two in Chicago that might be facilitated by the combination? I suspect that is minimal, and CP presents nothing but assertions to demonstrate it is significant. At best, it is significant to CP; but I doubt it is much more than rounding error to overall Chicago movements.
If Buffalo is a superior exchange point, why not negotiate an interline agreement that recognizes the current NS would be short hauled by doing so and compensate them accordingly? I know of no circumstance that would prevent that.
I think most of the economic arguments that have been put forth by CP are so much smoke. However, in the end the decision is going to be made on a political basis by the folks in Washington.
dknelson Perhaps the opportunities for CEO enrichment from that merger are not as attractive. In my experience most talk about synergies and unlocking value for shareholders and blah blah blah are just phrases to make Wall St analysts happy, or at least quiet. CEO enrichment is the name of the game and board members are chosen carefully to further that end. Dave Nelson
EHH needs more money? I doubt it. He wants another world to conquer for its own sake, for the challenge of it. Ackman, of course, another story. It just happens that working in double harness serves them both.
dakotafredEHH needs more money?
Well, it would certainly enrich his ego....
Larry Resident Microferroequinologist (at least at my house) Everyone goes home; Safety begins with you My Opinion. Standard Disclaimers Apply. No Expiration Date Come ride the rails with me! There's one thing about humility - the moment you think you've got it, you've lost it...
dakotafred dknelson Perhaps the opportunities for CEO enrichment from that merger are not as attractive. In my experience most talk about synergies and unlocking value for shareholders and blah blah blah are just phrases to make Wall St analysts happy, or at least quiet. CEO enrichment is the name of the game and board members are chosen carefully to further that end. Dave Nelson EHH needs more money? I doubt it. He wants another world to conquer for its own sake, for the challenge of it. Ackman, of course, another story. It just happens that working in double harness serves them both.
Thanks to Chris / CopCarSS for my avatar.
CPRS + KCS is something that should have happened YEARS ago. I hope there is enough sense somewhere down the road among the powers that be to help make this happen. Such a combination would provide an effective counter-balance with CPRS' chief rival, CN. When the heavy crude oil from northern Alberta and frac sand starts picking up again, it will make even more sense.
Transcontinental is much more benificial to the public that a horse shoe from Canada to Mexico. The shippers and receivers need service throughout the United States. Steamship lines call on all West Coast Ports for International traffic.
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