CPR to buy Dakota, Minnesota & Eastern Railroad Corp

[james_hunt]

I just found this and posted a link to the story here;

http://www.tracksideproductions.com/forums/index.php?showtopic=371

Since the story is fairly new, I thought I would alert anyone with an interest to it.

Anyway, what are your thoughts, what does this mean for CPR and how will this help CP position it's self for the future?

[Dakguy201]

I'm puzzled.

This is not the first time I've seen a reference to the DM&E being a connection to KCS at Kansas City.  As far as I am aware, the southmost point the DM&E achieves is Manley Iowa (or perhaps Mason City) on trackage rights on the UP. 

I think the KCS connection being discussed is the IC&E line that runs down the Mississippi and then southwest from Muscatine.  Even assuming DM&E has rights over that line, for any shipment originating or terminating in the Dakotas (or Powder River), it is very much the long way around.  Both the UP and the BNSF have routes that are much shorter.

Perhaps I have confused two different advantages to the CP for this combination?  The first being the proposed line to Powder River coal and the second a bridge between the KCS at Kansas City and the Chicago railroad complex.

Do you ever get the feeling that everyone in a room knows something that you don't?    

[MStLfan]

DM&E and IC&E are both owned by the same holding company, Cedar American if I am not mistaken.

The IC&E lines are the former I&M Rail Link, CP Rail, Soo Line, Milwaukee Road lines between Chicago, Kansas City and other Midwest places respectively.

So, things are moving. It seems that CP Rail is rethinking its sale of those lines.

greetings,

Marc Immeker

[gabe]

That is really a shame.  I wanted it to go to KCS.

Gabe

[CNW 6000]

Better get some pics of DM&E and ICE before they disappear!  Sure looks like CNW lines (even old ones!) are still a good commodity to own.

[Zwingle]

A legal technicality.  Actually Cedar American was created by DM&E Corp. for their IC&E aquisition.  Therefore, DM&E Corp. owns DM&E Railroad as well as Cedar American, which in turn owns the IC&E.  Thus, the sale of DM&E Corp. would include DM&E Railroad and Cedar American/IC&E.

This was a wise move by CP, as this was the last good chance for any real expansion without a merger.  No doubt CN's bidding helped boost the price up a several notches.

Looks like Mayo is going to be left kicking and screaming.

Future forcast: CP & KCS?

[Limitedclear]

That is really a shame.  I wanted it to go to KCS.

Gabe

Gabe -

KCS doesn't have the cash or borrowing capacity to take on this deal and also has no direct connection to the DM&E.

LC

[Anonymous]

Here is the link to the announcement from CP's site:

http://www8.cpr.ca/cms/English/Investors/Strategy/Growth/default.htm 

 

 

 

[Los Angeles Rams Guy]

As a current CPRS employee all I can say is that this is HUGE and EXCITING!!! First off, CP made a monumental mistake when they sold off the "Kansas City Corn Lines" back in 1997. When news broke earlier this summer about Cedar American looking for possible "investors", I was excited that CP was mentioned as a possibility but even then I thought that eventually it would be rival CN who would wind up with DME/ICE; simply because it would be a good fit for them, too and, let's be honest here, they've been a lot more aggressive than CP in the last 10 years or so in making acquisitions. So you can imagine my utter shock (and happiness) when I learned of this breaking news when I came into work this A.M. But I also believe that CPRS really, REALLY needed to do this because it would have been shut out of ANY real expansion possibilities had it lost out on this.  And now, with this move, CPRS has a real opportunity to be a REAL player in the next few years and I personally hope that somewhere not too far down the road that CPRS makes a play for the KCS.

Gabe, I understand your disappointment that it wasn't KCS who made the move.  That would have been a good fit for them as well.  But CPRS needed this much more than KCS or even CN needed it.  

[edbenton]

Lets see here STB plan to build into the PRB check approved by the STB check.  Cash and finacing ready CHECK.  Seeing the MAYO group PUKE and Spew a LATTE all over their papers if you are an employee of the DM&E today PRICELESS.  Somethings even Mastercard can not get you it takes a merger to do. 

[james_hunt]

I'm really hoping that this also means that CP and KCS will now conisder a merger down the road. 

I remember reading not to long ago that there were a couple of companies (UP, BNSF, CN) interested in KCS, but it was unlikely that the STB would approve any of these mergers as such a merger would give them too much of a monopoly in the region.  A CP/KCS merger would keep the competition more or less where it is today.

[SFbrkmn]

Doesn't surprise me @ all. There is no way DME can go at it alone on the PRW project. TAhey are either going have to have a partnership w/a class 1 or just outright merger. Whoever gets DME, be willing to spend millions on upgrades and see what that does to the bank savings.

[Limitedclear]

CP did need to do a deal or face continued pressure from private equity investment firms to take it over. With the DM&E and its Powder River project the new debt and related obligations will make the combined company a much less attractive target. Of course, the merger will still be required to pass the full STB Class 1 merger scrutiny, although it will likely be deemed a "minor transaction". Remember that a takeover of the KCS has already been deemed a minor transaction by STB.

LC

[gabe]

That is really a shame.  I wanted it to go to KCS.

Gabe

Gabe -

KCS doesn't have the cash or borrowing capacity to take on this deal and also has no direct connection to the DM&E.

LC

Sorry, I had just assumed that ICE would be part of the deal.  By the way, wasn't the ICE initially owned by CP?

Gabe

[senshi]

By the way, wasn't the ICE initially owned by CP?

Gabe

CP used to own the old ICE trackage under its SOO brand (SOO aquiring it from its purchase of the Milwaukee Road).  Hopefully I will be able to see some periodic white and red SOO's running through Genoa again.

I think CP will be a good fit in this, they seem to me to be a great company.  Also doesn't this put the core of the MILW back in the hands of a single company again.

[Los Angeles Rams Guy]

Lets see here STB plan to build into the PRB check approved by the STB check.  Cash and finacing ready CHECK.  Seeing the MAYO group PUKE and Spew a LATTE all over their papers if you are an employee of the DM&E today PRICELESS.  Somethings even Mastercard can not get you it takes a merger to do. 

Freaking HILARIOUS!!!!

[edbenton]

Lets see here STB plan to build into the PRB check approved by the STB check.  Cash and finacing ready CHECK.  Seeing the MAYO group PUKE and Spew a LATTE all over their papers if you are an employee of the DM&E today PRICELESS.  Somethings even Mastercard can not get you it takes a merger to do. 

Freaking HILARIOUS!!!!

Could not help myself today I remember reading and hearing all the fights that DM&E was having with Rochestor and esp MAYO Clinic.  The head of the Mayo Clinic today probaly needed Maylaox after reading that in the local paper knowing that they just lost big time.  I looked at the CP rail system they will be able to haul PRB coal all the way to Philly if they want now and NOT even have to interchange it at all with the system they have.

[Murphy Siding]

      Interesting, that CP doesn't appear too optimistic about the Powder River Basin, if you ask me.  From the press release: Future contingent payments of US$350 million will become due if construction starts on the Powder River Basin expansion project prior to December 31, 2025.   DM&E was always on the verge of starting tommorrow.  CP thinks sometime in the next 18 years?

[Anonymous]

It might not be necessary to climb over ourselves to get photos of the blue & yellow livery before it disappears just yet. It seems CPR has been pretty slow about repainting the SOO units (but I'm glad I got all the photos I have so far).

I wonder what effect this will have on the DME/ICE employees? Major cutbacks? Mergers always mean belt-tightening (except for the execs who either get big bonuses or major severance packages).

[gabe]

The part of this that really has me laughing is the effect on BNSF.  I just have to believe that BNSF had a hand in a considerable amount of the resistance that was stired up over this expansion. 

Had it worked out the way DM&E wanted, they might have been able to continue to act as an indepentent carrier--which would not be as competitive against UP/BNSF--while conducting the PRB expansion.  But, because BNSF won the battle, they are going to lose the war by having a high-roller/Class I competing in the PRB instead of a regional. 

I think BNSF would have been better off had they bankrolled the project for DM&E.

Gabe

[joemcspadden]

DM&E was "on the verge of starting tomorrow" (PRB) in terms of their
own desires. but there were still several huge hurdles they would
have had to overcome to make this a reality.

It sounds, from the preceeding posts, like the Powder River Basin
expansion isn't necessary to justify this purchase from a business
standpoint, anyway. It now may be something that never happens.
There will still be enough additional traffic to keep the Mayo people
spewing their lattes, though. True railfans can at least take con-
solation in that.

Joe

[jrbernier]

  Since there is not much duplication of lines - the operating crews should see little change.  DME/ICE office staff may very well see lost jobs or a move in their future.

  BTW, the Winona - Owatonna line is still out of service from the flood.  At least two major bridges are down and about 1/2 mile of rail was washed out.  Ballast trains and lots of heavy equipment are on the line right now.  I was out there on Sunday and I would expect maybe 1 - 2 more weeks of work before the line is operational.  Rochester industries are being served by a turn job from Owatonna or Waseca.  A ballast train is sitting in Rochester at this time.

Jim

[Limitedclear]

That is really a shame.  I wanted it to go to KCS.

Gabe

Gabe -

KCS doesn't have the cash or borrowing capacity to take on this deal and also has no direct connection to the DM&E.

LC

Sorry, I had just assumed that ICE would be part of the deal.  By the way, wasn't the ICE initially owned by CP?

Gabe

Gabe -

Actually you are correct. IC&E is included in the deal. You are also correct that IC&E which is the former IMRL was CP/SOO Line's "corn lines" before they were sold to IMRL. Still, the KCS doesn't have the cash to do this deal (witness the NS/KCS JV on the Meridian Speedway and the recent KCS application for an FRA RRIF loan for the Rosenberg Line). I misread which DM&E CP was acquiring. They are acquiring DME Corp which is the parent of both RRs.

LC 

 

[MStLfan]

I had actually hoped DM&E would build their own Powder River line, buy / lease a lot of modern diesels in blue and gold for coal trains and then I would go to the US and take pictures of them.

So much for sympathy for the little guys.

greetings,

Marc Immeker

[EJE818]

It is kind of too bad that the blue and yellow IC&E and IMRL power will fade eventually, but that progress. Maybe that means the IC&E and DM&E engine will be able to roam the CP system, which I really wouldn't mind at all. Another good thing is maybe CP will be be able complete the PRB project faster then the DM&E would have done.

[tatans]

1.45 billion(is that British or American??)1,000,000,000 or 1,000,000,000,000, whatever it is, that means there is no money left up here in Canada. ''THE CANADIANS ARE COMING ! !  THE CANADIANS ARE COMING ! ! )

[MStLfan]

Maybe that means the IC&E and DM&E engine will be able to roam the CP system, which I really wouldn't mind at all.

Ah, I forgot that! Thanks for the reminder.

greetings,

Marc Immeker

[nanaimo73]

Quite a few of DME's SD40-2 locomotives are ex CP. Probably some of them are still in CP paint.

[CNW 6000]

Quite a few of DME's SD40-2 locomotives are ex CP. Probably some of them are still in CP paint.

So you could patch the patch on the repaint? 

[Limitedclear]

Here is the complete CP press release:

Canadian Pacific announces agreement to acquire DM&E Railroad   September 4, 2007
Calgary, Alberta

Canadian Pacific Railway Limited (TSX/NYSE: CP) announced today that it has reached an agreement to acquire Dakota, Minnesota & Eastern Railroad Corporation and its subsidiaries (DM&E) for US$1.48 billion.   With this value-enhancing transaction, CP expands its current network by approximately 2,500 miles and increases its access to U.S. Midwest markets including agri-products, coal and ethanol.  The deal consists of a US$1.48 billion cash payment at closing and future contingent payments of up to approximately US$1.0 billion.  Future contingent payments of US$350 million will become due if construction starts on the Powder River Basin expansion project prior to December 31, 2025.  Further future contingent payments of up to approximately US$700 million will become due upon the movement of specified volumes of coal from the Powder River Basin over the Powder River Basin extension prior to December 31, 2025.

• download the DM&E Investor Fact Sheet (includes map)

"The DM&E is an excellent fit for Canadian Pacific making this a strategic end-to-end addition to our network," said Fred Green, President and Chief Executive Officer of CP.  "The DM&E is a high-quality, growing regional railroad that complements our existing franchise.  This investment presents the opportunity for future growth through further expansion of our network and is accretive to our EPS in 2008."

"There are natural synergies between our two railroads which make this a very attractive transaction.  We have a solid transition plan that I am confident we will implement successfully.    CP is the safest railroad in North America and we will work together to build on the significant improvements the DM&E has made in operating efficiency and safety over the past several years. This includes CP's intention to spend an additional US$300 million of capital for further upgrading of the regional railroad over the next several years."

"Canadian Pacific is our natural partner and we are very pleased with this deal.  The logic of this acquisition is compelling," said Kevin Schieffer, President and CEO of the DM&E. "I'm proud of the DM&E and the organization we've built; our operating ratio is one of the best in the industry.  The combination of our two companies and the resulting efficiencies will be very positive for our customers. CP is not only a natural operating fit; we also share a commitment to our employees, our customers and the communities we serve as well as a vision for the potential of the Powder River Basin."

The addition of the DM&E extends the reach of CP's network.  It increases the rail network, and adds new customers and expands the service available to customers of both companies.  The DM&E is the largest regional railroad in the U.S. and the only Class II railroad that connects and interchanges traffic with all seven Class I railroads, connecting with Canadian Pacific at Minneapolis, Winona, MN and Chicago.  It had 2006 freight revenues of approximately US$258 million, which is expected to grow to approximately US$280 million, or by nine per cent in 2007.  The DM&E is headquartered in Sioux Falls, SD and has approximately 1,000 employees, 2,500 miles of track and rolling stock that includes 7,200 rail cars and 150 locomotives.  It serves eight states; Illinois, Iowa, Minnesota, Missouri, Nebraska, South Dakota, Wisconsin and Wyoming with access to Chicago, Minneapolis/St. Paul, Kansas City and key ports.

The DM&E has been pursuing a strategy to become the third rail carrier in Wyoming's Powder River Basin.  The Powder River Basin is North America's largest and most rapidly growing source of low-cost, low-sulphur coal as well as the largest single rail market in terms of volume. 

"Canadian Pacific is excited about the prospect for growth in the coal-rich Powder River Basin," Mr. Green said.  The DM&E's favorable geographic position provides a unique ability to create an efficient and competitive additional link to midwestern and eastern utilities.   We have created a disciplined plan aimed at facilitating a decision on the expansion and ensuring the investment provides returns that exceed our thresholds.  Our purchase agreement has been structured to share further upside as the benefits of the expansion are realized.  We are confident this will provide maximum long-term value for our shareholders." 

"With our strong balance sheet, this investment represents the best use of our free cash," said Mike Lambert, Chief Financial Officer of CP  "We have secured fully committed acquisition financing as part of this transaction.  Permanent financing for this acquisition and future financing for a potential PRB expansion will be structured to preserve appropriate debt and coverage ratios for our investment grade rating."

In conjunction with this purchase, Canadian Pacific has suspended activity under its current share repurchase program that commenced in March of 2007.  CP has purchased 3,209,790 shares in 2007. 

With the successful completion of this transaction, which is expected to close in the next 30 to 60 days, Canadian Pacific confirms that its outlook in 2007 for diluted earnings per share, excluding foreign exchange gains and losses on long-term debt and other specified items, remains unchanged in the range of CDN$4.30 to CDN$4.45.

The CP/DM&E transaction is subject to review and approval by the U.S. Surface Transportation Board (STB), during which time the shares of DM&E will be placed into an independent voting trust.  The review process is expected to take less than a year. CP expects that the operation will become part of CP's U.S. network upon completion of the review. The voting trust is required by US law so that CP does not exercise control over DM&E prior to approval of the transaction by the STB.

Conference Call

 

Fred Green, President and CEO, Mike Lambert, Executive Vice President and CFO and Kathryn McQuade, Executive Vice President and COO, will be available to discuss this announcement with investment analysts and the media in a conference call beginning at 11 a.m. Eastern time (9 a.m. Mountain time) on September 5.  Dial-in numbers: 416-640-1907 or 800-732-9303.  Callers should dial in 10 minutes prior to the call.   A replay of the conference call will be available by phone through September 30, 2007, at 416-640-1917 or 877-289-8525, pass code 21237495 followed by the pound key.

 

This call will also be Webcast: live via CP's website at www.cpr.ca. To access the Webcast, click on Investors and follow the links.  The Webcast will be archived through August 31, 2008.

 

Note on forward-looking information

 

This news release contains certain forward-looking statements relating but not limited to the proposed acquisition transaction and our anticipated financial performance.  Undue reliance should not be placed on forward-looking information as actual results may differ materially.

 

By its nature, Canadian Pacific's forward-looking information involves numerous assumptions, inherent risks and uncertainties, including but not limited to the following factors: changes in business strategies; general North American and global economic and business conditions; risks in agricultural production such as weather conditions and insect populations; the availability and price of energy commodities; the effects of competition and pricing pressures; industry capacity; shifts in market demand; changes in laws and regulations, including regulation of rates; changes in taxes and tax rates; potential increases in maintenance and operating costs; uncertainties of litigation; labour disputes; risks and liabilities arising from derailments; timing of completion of capital and maintenance projects; currency and interest rate fluctuations; effects of changes in market conditions on the financial position of pension plans; and various events that could disrupt operations, including severe weather conditions, security threats and governmental response to them, and technological changes.

 

There are factors that could cause actual results to differ from those described in the forward-looking statements contained in this news release.  These more specific factors are identified and discussed in the Outlook section and elsewhere in this news release with the particular forward-looking statement in question.

 

Canadian Pacific undertakes no obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise except as required by law. 

 

About Canadian Pacific

 

Canadian Pacific, through the ingenuity of its employees located across Canada and in the United States, remains committed to being the safest, most fluid railway in North America.  Our people are the key to delivering innovative transportation solutions to our customers and to ensuring the safe operation of our trains through the more than 900 communities where we operate.  Our combined ingenuity makes CP a better place to work, rail a better way to ship, and North America a better place to live.  Come and visit us at http://www.cpr.ca/ to see how we can put our ingenuity to work for you.  Canadian Pacific is proud to be the official rail freight services provider for the Vancouver 2010 Olympic and Paralympic Winter Games.

end

 

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