Merger idea... CP+IC&E+DM&E+KCS

[CSSHEGEWISCH]

I'm not sure that the utilities are all that willing to invest in DM&E to build a third PRB line since it may have a low rate of return. Also, would the existing parent firm be willing to cede a large part of its controlling interest for equity financing of the line? In a similar vein, the original Wheeling & Lake Erie was leased by Nickel Plate instead of merged by an exchange of stock since the NKP stockholders did not wi***o have their interests diluted.

At any rate, $2 billion is a lot of money and it will have an effect on DM&E's bottom line whether it is equity financing or debt, equity financing implies that the new stockholders will expect to receive regular dividends.

[gabe]

QUOTE: Originally posted by Murphy Siding

Future Model : Hang on a minute, my head is spinning , and I can't get it to stop. If the DM&E borrows 2 billion dollars, the figure they say need to BORROW, how does that not necessarily imply debt???? I'm not sure I understand your comments about the utility companies having the DM&E's back? In the real world of business, the utilities would buy their coal from the devil and ship it on horseback, if that was the most cost effective source. They won't pay the DM&E a premeum and I can't see how the DM&E would be able to do it at a discount?

I think FM is right on this one. I remember reading somewhere that a sizeable portion of the DM&E project was not funded out of debt.

MS, there are several ways this can be done. DM&E could issue shares of common stock is the most common method.

Gabe

[Anonymous]

QUOTE: Originally posted by Murphy Siding

Future Model : Hang on a minute, my head is spinning , and I can't get it to stop. If the DM&E borrows 2 billion dollars, the figure they say need to BORROW, how does that not necessarily imply debt???? I'm not sure I understand your comments about the utility companies having the DM&E's back? In the real world of business, the utilities would buy their coal from the devil and ship it on horseback, if that was the most cost effective source. They won't pay the DM&E a premeum and I can't see how the DM&E would be able to do it at a discount?

Spinning, you say? Hmmmm, if only there was a way we could tap that for a new energy source.

If DM&E says they are borrowing 2 billion, that may be the up front money to pay for construction. It may be that later they will issue stock to pay down this debt. I wouldn't normally expect a company to borrow that much, but then again with interest rates as low as they are right now, it may make more sense for them to borrow with low interest rates and then later retire some or most of the debt later with equity financing. Bottom line - if someone is willing to loan them that amount at reasonably low interest rates, then common sense says go for it.

[Murphy Siding]

Knowing what you know, would buy stock to finance something like this?

[gabe]

Possibly. What you have to remember is the utilities are virtually a silent partner on this deal. That means 2 things: (1) don't expect DM&E to make a huge amount at their expect but (2) don't expect the line to go under as well.

I would also point to the growing importance of Powder River Basin coal on the East Coast.

Gabe

[MP173]

I doubt if i would invest in DME, but I would take a look. There are certain threshholds that companies must reach before I invest. Two of the most important are return on equity and generation of free cash flow.

On this type of investment, I would require a projected ROE in the 20% plus range. Therefore, either their rates would need to be high, or the company would need to be very, very leveraged in order to achieve that ROE. High rates are doubtful, based on Futuremodals excellent description of what happens when a third party enters the market.

A high level of leverage is extremely risky, the threat of default is great (look at GM today, even flushed with cash, their bonds and stock has plummeted based on future earnings projections).

Further, if the debt is secured to the assets...and no doubt it would be, the interest rates would no doubt be rather high. This rail line would no doubt be a one function line....haul coal and lots of it. There is very little traffic that would warrent the pumping of capital into the line to rebuild it. Today's traffic obviously moves fine at a slow speed. Since the line would be built for coal and coal only and since there would now be three competitors...the rates would fall quicker than a prom dress.

No thanks.

ed

[Anonymous]

Ed,

If you require a 20% ROE on your investments, then you probably don't own any railroad stock, or any of the capital intensive industries. Unless, of course, you are including an estimate of "intangible" benefits as part of that 20%!

[MP173]

The only rail I own is CN.

I purchased Illinois Central stock years ago and it has been quite an investment.

I do own a few stocks with lower ROE such as ADM and McDonalds (again, both purchased years ago) and I own one utility (Ameren), but the last few years I have refined my investment strategy to the ROE and free cash flow model, based on purchasing at a discount to fair value. Exxon Mobile is very capital intensive stock with less than 20 ROE, but again, it was purchased quite some time ago.

Ask me in a few years if this plan has worked! By setting parameters (financial) I really try to take the emotion out of it.

Funny, tonight I got stopped by a CN westbound and found myself both enjoying the train and counting the cars (in order to try and determine revenue...it was a 128 car monster). So, I got a little entertainment and good return out of that train tonight.

ed

[Anonymous]

Ed,

You may have stumbled onto something here with the IC stock. Maybe the best rail investment is to buy and hold the stock of a likely merger candidate. Unfortunately, as per this thread the only likely takeover candidate left is KCS, perhaps one or more of the publicly owned regionals, but little else. Any parallel or coast to coast mergers probably isn't going to offer any stockholder gains at this point, and I am seriously doubting that there are going to be any mergers allowed beyond something involving KCS, maybe the takeover of a regional or two.

That's why it might pay to follow the DM&E thing and grab a few equity shares should they become available. Either the shares will increase when DM&E is takenover by a larger road, or they will become worthless when DM&E goes belly up.

The party's over for those investing in railroads to profer takeover gains.

[fuzzybroken]

My [2c] on this one:

I always thought that CP+KCS would be a logical end-to-end merger, till CP went and dumped the IMRL (later ICE).

I've also wondered why ICE, although owned by the same company as DME, is a separate company. So I think, maybe Cedar American is keeping ICE separate from DME for the time being as a contingency on the PRB extension. That is, if the extension is successful, they have good routes to Kansas City and Chicago; if less than successful, it would probably be easier to sell a whole railroad (ICE) as one unit than to have to re-separate the lines from the rest of the system!

My opinion is, the PRB extension is a done deal. Everything has been approved, line up the earthmoving equipment, ties, ballast, and rails.

KCS was in the running to buy the CP's lines that became the IMRL/ICE, but it went to Washington Corp. instead. They ended up turning their attentions to MExico.

CP would probably not be the railroad to go after merger with anybody else. I think it would be more likely that KCS and Cedar American would agree on a merger, then go after CP probably even before the dust settles!

But that's just the ideas swimmin' around in my head.

-Mark
www.fuzzyworld3.com

[Murphy Siding]

Fuzzy- I had always thought that they were kept as two seperate entities ( IC&E and DM&E ) for some kind of paperwork advantage . For example, I've read that Guilford Transportation keeps several of their roads seperate, then runs them by way of a seperate holding company (Springfield Terminal?) . Seems it had to do with work rules, taxes or something. I know there was a specific reason why they did it. For what it's worth, the most common power I've seen mixed with DM&E blue and yellow diesels was bright red CP units.

[nanaimo73]

DME bought 23 SD40s from CP Rail, 19 in 1999 and 4 in 2000. The CP numbers were 5501 to 5563. Would those be the CP units you saw, Murphy ?
CP has also sold a large number of SD40s and SD40-2s to leasing companies over the last 5 years, perhaps 100 all together.

[Murphy Siding]

Nanaimo- While it's entirely possible that some of the red units are ex-CP units,it seems most times when I've seen red diesels up close, they're lettered as CP RAIL. Granted, all I see would be DM&E trains. I'm a long way from ICE rails.