The STB on Tuesday rejected the voting trust of CN-KCS based on; shipper comment, DOJ analysis, and a possible triggering of downstream mergers resulting from the transaction.. The STB has been harping recently about preserving rail competition. However the real threat is on the Interstate System. Not between the railroads...
I'll say this before I move on. If CPKC moves forward the operational side of this merger will not provide any improvements in Intermodal or Merchandies traffic. Low priority bulk traffic will be the only traffic that gets a benefit from this combination. CP does not have that great of a network compared to CN. The lack of its own line between Chicago-Detroit, and its Detroit-Windsor tunnel can not accomodate double stacked high cube containers. All DS HC containers move on CSX rights via Buffalo, NY to points east.. Any traffic increases on CP's part will not come cheap at either NS, or CSX. Especially the formers line between Chicago and Butler.. The proposed CPKC route south from La Crescent, MN to Shreveport, LA will be slow and curvy, and contend with many stiff grades in the Ozarks..
Oh and you still have to deal with UP in the Houston Terminal. Beaumont to Rosenberg is a slow grind for KCS, and unless CPKC plans on throwing CAPEX at this section of rights. Don't expect UP to work with you! Moving on..
Two quotes from Bill Stephens recent write up about the CN-KCS decision.
"But this STB decision is unfair because it cements an advantage trucks have over railroads. Trucks can go anywhere. Railroads can go only as far as their maps will take them. Interchanges at Chicago, Memphis, and other gateways between East and West add delays, make service unreliable, and force customers to deal with more than one railroad. It is a recipe for continued loss of rail traffic to the highway."
"If the STB wanted to create a level playing field between trucks and trains, it would figure out a way to preserve rail-to-rail competition while allowing Class I mergers. Canada has had success with two transcontinental systems for a century. It can work in the U.S. of A. too – if only the STB would allow it."
The first paragraph speaks to a region of the nation called the Mississippi Watershed. States such as; Minnesota, and Iowa produce significant amounts of consumables for the rest of the nation. Yet no C1's are going to short haul themselves in this region. Many may say we don't need a duopoly. I say we do. The Midwest would most benefit from a duopoly. Eliminating interchange and speeding up car velocity. Intermodal would be a major beneficiary of such mergers eliminating a fair amount of draying. As many of you know. Drayage substantially increases the cost of such moves to where it can eat IM rates alive. A few lanes that would reap the pros, and some new lanes that could open up:
Atlanta-Minneapolis
Houston-Indianapolis
Louisville-Laredo
Detroit-Laredo
Pittsburgh-Minneapolis
Columbus-West Coast/PNW
Toronto-Laredo
If Chicago is the chokepoint that congeals the nations networks. Then get rid of it by creating two transcons that can serve many more markets efficiently. Bypassing the Windy leaves it as an origin/terminating point. Freeing up much needed capcacity.
Trucking has no such barriers. If the STB did a proper analysis on freight lanes now into 2050. They would get the true picture of modal competition. If they truly care about preserving competiton. Recognize the elephant in the room not the ghost of years past...
Paragraph two is simple. At 3.85 Million square miles. Canada has a population of roughly 38 Million. Less than the state of California. CN, and CP provide transcon service in a market almost 10x smaller than the US. Yet south of the border at approximately 334 Million we struggle to move freight efficiently from coast to coast.. So STB.. If you plan on making it difficult for future transcon mergers. Just remember. You're giving truckers an edge that will be very difficult to catch up with.. IF! At all..
Whew, a lot to unpack in this one. Two separate sections on this one, the first where you give your opinion on CPKC versus CNKC. The second is where you talk about whether a duopoly would benefit shippers in the US. I will speak to these issues one at a time.
CPKC versus CNKC
UP in the Houston area is going to be a problem for either combination. I believe the problem will be manageable because neither railroad is going to be able to divert large amounts of time sensitive traffic from UP, BNSF hasn't, nor will CPKC or CNKC. Mexican traffic predominantly crosses the border at Laredo and from that point UP has the best route to the Midwest. The very large amount of cash in CN's offer would have been a serious impediment to any planned track improvements on the combined system, indeed I wouldn't have been shocked to see CN shortline off the former Gateway Western lines for cash, their statement that they would invest $300 million in upgrading that line was worth just about as much as the paper it was printed on. I expect that CN would have done just enough maintenance on the KC to Shreveport mainline to handle the bulk traffic and one all-purpose freight each way daily, and even that could be jeopardized by CP moving its traffic elsewhere. Once coal traffic goes away, What little Iowa grain traffic that CN could divert will not make up for the loss of the majority of CP traffic once existing contracts end. I don't believe that CN fooled the STB into thinking they really wanted KCS for any reason but reduce competition from the Upper Midwest by one railroad, and that railroad was CPKC. I don't think it was explicitly any hatred for CP, it is as much KCS as CP. Certainly CN would have needed the expanded system to create enough income to payoff the increased debt, but for CN long term, the only valueable part of KCS was south and west of Jackson, MS.
US National Duopoly
US railroads will never compete effectively with truckers until the fixation on raising rates until you drive off customers ends. That and the Flavor of the Decade "Precision Scheduled Railroading", which isn't precise, and isn't really scheduled, won't allow it. If you want real railroad competition, then the only answer is "Open Access". Don't nationalize the tracks, the Big 4 control all the most important routes, keep them the owners of the track and doing dispatching. Don't let them run the trains after perhaps a short transition period. All trains will have to be really scheduled and operate on a path that the train operator will pay for. All trains will have to be powered up enough to make track speed, they won't have to be jackrabbits, but they will have to be able to accelerate reasonably. Ideally one transcontinental route will handle Intermodal and the other bulk traffic. Americans pooh-pooh European freight practices and trains, but bemoan rails inability to compete with trucks for higher paying freight on all but the longest hauls. American train operating practices are the reason, and nothing will change until they change.
As a CN shareholder, I am not disappointed of the failed merger with KCS. Perhaps in my short sighted view, the price seemed very high for the railroad. The price just didnt seem to make sense for the asset. The price/revenue ratio was over 12. Price to earnings...well, who knows?
Perhaps the market agreed...the CN share price has skyrocketed since the STB threw out the proposal. I am not much on short term share movement, but buyers moved in.
Can anyone explain where the potential growth is? Intermodal? I dont see it. Not $30 billion worth. Grain? Perhaps some.
The above explanations of CP's route difficiencies in the US have been adequately detailed above. Where and how will those inefficiencies be addressed? CP is a minor player in the Chicago - Canada intermodal market compared to CN, their daily intermodal train from Chicago to Toronto today had an unusually high 226 containers - usual count is in the 100 - 150 range. Of the 226, only 66 were domestic containers. Last night's Toronto - Chicago intermodal had 105 containers, all international. That is a normal count.
Let's break that down...the high majority of the 331 containers - 80% were international, movements which do NOT require high speed. The market is speaking volumes...avoid the CP route for high speed, consistent required intemodal movements from Chicago to Eastern Canada. Not difficult to figure out...look at the map. Not only does CP require the use of CSX for a big chunk of the route, but also their Chicago terminal is way up north. So, not only does CP need CSX as a landlord, but for a few hours (yes hours in Chicago) the intermodal trains will need to travel north (in addition to west) to reach terminal.
Most of the Chicago business is moving either to Wisconsin, Indiana or the southern farmland sprawl. Wisconsin will still be either a shorthaul intermodal to reach the Chicago terminal or truck cartage.
The route to Kansas City, once the Chicago terminal has been reached, is slow and painful. Either considerable investment must be made, or costly haulage arrangements via BNSF must be agreed upon. I dont know much about the route beyond KC, but I dont think it screams "speedway".
These are my observations, limited as a railfan, not a railroader. Where am I wrong? Please point out how this will work for CP to pay such a premium for KCS.
Sometimes the best deals are the ones you dont make. Perhaps this is one of those "best deals" for CN.
Ed
Ed, CP's original bid was based primarily on the issuance of new stock. Only $90 per share was in cash. The revised bid still only includes $90 in cash, it just includes even more CP stock. The major risk if CP management cannot make this merger work is to CP shareholders, with the share price collapsing. I don't think there is any chance that the merger will fail utterly, only that the benefits could be less than promised.
Oh, and Ed, CN's share price didn't skyrocket, it went back to where it was just before they announced their offer for KCS.
BTW the $90 per share means that CP only needs $8.18 billion in cash to complete the transaction. Plus of course expenses incurred.
$8,177 million payable to KCS shareholders
- $700 million contribution from CN
_____________________________
$7,477 million cost to CP from the acquisition in cash
Plus of course the additional stock now on the market, legal expenses and consulting fees.
John Beaulieu
KCS has long had a price earnings ratio higher than the other Class I carriers. Frankly, it makes no sense to me, but there are two possibilities. One, KCS has convinced the market that rapid growth in Mexico justifies a high P/E. Two, since KCS is the only easy (relatively) to merge line on the board, it carries a 'merger opportunity' premium. The two together did not support pre-CP offer P/E ratio.
Now the bidding war ran the price, and thus the P/E ratio, through the roof. KCS shareholders should take the money and run. If CP 'suceeds' they will be paying for the KCS for a very long time.
If I was a CN shareholder, I would thank God that I dodged the KCS bullet.
Mac
I've felt, rightly or wrongly, that CN's interest was more to either keep CP from getting it or make CP pay more for it.
Jeff
I believe the STB made the right decision. They correctly pointed out that such a merger would leave CP as the smallest (by far) of the big systems, and that would have left an imbalance that in turn would have encouraged further industry consolidation.
I don't think a merger would have done much to take trucks off the road anyway. And there's nothing stopping CN (or any other railroad) from engaging in joint marketing efforts and working together to identify operating synergies.. all of that can be achieved without a merger.. without spending 33 billion dollars. Same can be said for the proposed KCS - CP merger.. its a whole lot of money for nothing. CN and CP both have fabulous physical plants that could handle more growth, particularly in the East. There's lots of low hanging fruit to be picked right here without even looking at Mexico.
John Beaulieu:Thanks for your comments. I will take minor exception with your comment of CN stock returning to where it was before the takeover. I just checked and the previous high for CN was in April at $118 and change. My term "skyrocket" is incorrect in that light, but the rise from $110 to current price of $127 in less than a week, is "skyrocket", at least in my investment world.
Needless to say, I didnt "get it" as a CN shareholder and am quite delighted with the turn of events.
Ulrich nailed it....this merger will take very few trucks off the highways. Perhaps other events will remove trucks in the future.
SD60MAC9500Paragraph two is simple. At 3.85 Million square miles. Canada has a population of roughly 38 Million. Less than the state of California. CN, and CP provide transcon service in a market almost 10x smaller than the US. Yet south of the border at approximately 334 Million we struggle to move freight efficiently from coast to coast
Since most of the Canadian Population lives within a very short drive from the United States border..........isn't it true that both CN and CP could probably be ripped up and scrapped and Canada could easily make do with just trucking North from U.S. Rail Terminals? Not really buying into the CN or CP are vital to any serious interest that the STB should be overly concerned about. I think they are both relatively minor players compared with existing U.S. Class I's.
jeffhergertI've felt, rightly or wrongly, that CN's interest was more to either keep CP from getting it or make CP pay more for it. Jeff
If you look at a Mexican rail map, Union Pacific always had a better deal with 26% ownership in massive Ferromex than KCS has with it's tiny railroad. UP and BNSF both are striking intermodal deals with Ferromex I believe that will out compete KCS in both speed and reliablity.
Additionally, if Mexico ever built decent connections into Central America, Ferromex would be an even higher value because it's lines are far less circuitous than KCS de M. Look at Ferromex very direct West Coast Line hitting all the Pacific Ports in Mexico. KCS de M. can't match that either.
Given that above, it is a little humorous CP and CN are fighting over KCS at all.
CMStPnP If you look at a Mexican rail map, Union Pacific always had a better deal with 26% ownership in massive Ferromex than KCS has with it's tiny railroad. UP and BNSF both are striking intermodal deals with Ferromex I believe that will out compete KCS in both speed and reliablity. Additionally, if Mexico ever built decent connections into Central America, Ferromex would be an even higher value because it's lines are far less circuitous than KCS de M. Look at Ferromex very direct West Coast Line hitting all the Pacific Ports in Mexico. KCS de M. can't match that either. Given that above, it is a little humorous CP and CN are fighting over KCS at all.
CMStPnP SD60MAC9500 Paragraph two is simple. At 3.85 Million square miles. Canada has a population of roughly 38 Million. Less than the state of California. CN, and CP provide transcon service in a market almost 10x smaller than the US. Yet south of the border at approximately 334 Million we struggle to move freight efficiently from coast to coast Since most of the Canadian Population lives within a very short drive from the United States border..........isn't it true that both CN and CP could probably be ripped up and scrapped and Canada could easily make do with just trucking North from U.S. Rail Terminals? Not really buying into the CN or CP are vital to any serious interest that the STB should be overly concerned about. I think they are both relatively minor players compared with existing U.S. Class I's.
SD60MAC9500 Paragraph two is simple. At 3.85 Million square miles. Canada has a population of roughly 38 Million. Less than the state of California. CN, and CP provide transcon service in a market almost 10x smaller than the US. Yet south of the border at approximately 334 Million we struggle to move freight efficiently from coast to coast
Vancouver is a lower cost port than American ports, and Prince Rupert is much closer to Asia than any American port. Halifax and St John are also positioning themselves to capture European shipping to the US. They are intermediaries in much traffic to the US. Now Canadian rail companies are trying to connect Canada to Mexico thru the US. International law tries to limit interference by intermediaries in international shipping. Yes, the STB should be concerned.
longhorn1969Do not think the Biden administration is keen on major mergers. STB may have given the CP the nod, does not mean the DOJ will.
Tend to think CP & KCS are viewed as being analogous to the little sisters of the poor when measured against the other Class 1, which includes CN.
Creating a marriage of the little sisters gives them the strength to play the Class 1 game with a chance of success.
Never too old to have a happy childhood!
The DOJ does not have jurisdiction over rail mergers. They can only act in an advisory manner. STB has the final say.
CMStPnP Since most of the Canadian Population lives within a very short drive from the United States border..........isn't it true that both CN and CP could probably be ripped up and scrapped and Canada could easily make do with just trucking North from U.S. Rail Terminals? Not really buying into the CN or CP are vital to any serious interest that the STB should be overly concerned about. I think they are both relatively minor players compared with existing U.S. Class I's.
It is true that about 90% of Canada's 38 million citizens live within 150 miles of the US Border.
That is somewhat of just an interesting fact, because no matter where the folks live Canada has a bounty of natural resources and agricultural land, and significant heavy industry.
CP and CN in Canada by themselves are both viable railroads and integral parts of the North American economy. Throw in their US subsidiaries and their importance is magnified.
Not only do most of them live 150 miles form the US, but the vast majority live south of cities like Minneapolis.
But as mentioned, Railroads mostly haul goods and commodities, not people. So, where the Tar Sands are as an example is way more important than where the people are.
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