I've been wondering for a while now if NS was going to regret that near miss in 2016. My guess is that, in the long term, they will. Coupled with the company's rash of troubles throughout 2019-2020, this merger almost certainly makes them fodder down the road for the next power play (and they will probably wind up as completely unequal 'partners' in that move).
On the upside, I'm glad that CP (probably) won't have to give up its identity in this merger - given KCS' size, Canadian Pacific should remain just Canadian Pacific after this... and not some horrid amalgamation like Canadian Pacific Southern or whatnot. Their locomotives will be a nice sight down south.
KCS is the only rr I have bought stock shares and have done well. This will be a payout for shareholders. Bring it on CP. Ching, ching
Now's the time to buy either one..
In todays trading
KCS was up $24.93 to $249.09 a share
CP was down $21.95 to $356.53 a share
Never too old to have a happy childhood!
azrail The combined parent company will be called "Canadian Pacific Kansas City"(?) That's an awful name. CP International would be much better. Mark Vinski
The combined parent company will be called "Canadian Pacific Kansas City"(?)
That's an awful name. CP International would be much better.
Mark Vinski
If it gets approved this will be a home run for CP and KCS. Personally I hope they keep the red locomotives and the beaver herald along with Canadian Pacific.
kgbw49 Given the potential for increased traffic from Canada to Mexico through KC, does anyone have any thoughts as to where 15,000-foot sidings can be installed between La Crescent, MN and Bettendorf, IA?
Given the potential for increased traffic from Canada to Mexico through KC, does anyone have any thoughts as to where 15,000-foot sidings can be installed between La Crescent, MN and Bettendorf, IA?
I'd be more worried about the line south of Bettendorf. That's going to be the wink link in the chain. It's an up and down railroad along much of the route in southern Iowa.
The eastward grade out of Ottumwa was a regular helper grade (maybe the only one on the MILW east of the mountains) in steam days. I think something like 1.8%. One dispatcher in his memoirs (J. F. Frana, "Trains don't Fly") called Ottumwa "Hog Back Hollow." A large section between Cotter (a siding west of Muscatine) and (IIRC) Laredo, MO is unsignalled.
Signalling is possibly a mute point with PTC. CPRS and it's predecessors back to the MILW made it work. Still, as someone on one of my e-mail groups suggested the MILW probably should've looked at taking the entire exGolden State route in southeastern Iowa.
Jeff
jeffhergert kgbw49 Given the potential for increased traffic from Canada to Mexico through KC, does anyone have any thoughts as to where 15,000-foot sidings can be installed between La Crescent, MN and Bettendorf, IA? I'd be more worried about the line south of Bettendorf. That's going to be the wink link in the chain. It's an up and down railroad along much of the route in southern Iowa. The eastward grade out of Ottumwa was a regular helper grade (maybe the only one on the MILW east of the mountains) in steam days. I think something like 1.8%. One dispatcher in his memoirs (J. F. Frana, "Trains don't Fly") called Ottumwa "Hog Back Hollow." A large section between Cotter (a siding west of Muscatine) and (IIRC) Laredo, MO is unsignalled. Signalling is possibly a mute point with PTC. CPRS and it's predecessors back to the MILW made it work. Still, as someone on one of my e-mail groups suggested the MILW probably should've looked at taking the entire exGolden State route in southeastern Iowa. Jeff
Can't speak to whether north or south of Ottumwa, IA would be worse for 15,000 foot sidings, but I can tell you from personal experience it will take a lake full of money to put sidings like that anywhere near Poteau, OK and Mena, AR. The Ozark/Ouachita Mountains aren't the Rocky Mountains, but they aren't the coastal plain of Georgia, either. I don't know how much more traffic can be put over the existing railroad without major improvements, but when that point is reached CPKS will have to do work comparable to Southern Rwy. opening up the Rathole. That is some seriously up-and-down land.
The Spine Line would have been a great acquisition too. CP's KC-Chicago and KC-Twin Cities routes are very circuitous as well as capacity-constrained. I don't see the $50 million of reported investment really putting much of a dent into things.
Frankly, I think this transaction is more about buying KCS' franchise than it is about creating a monster integrated system. A lot of KCS' traffic is interchanged with other carriers (such as UP at Laredo), which will have to continue to keep the money coming in. With the exception of access to Mexico, this merger still pales in comparison to the network that CN has assembled.
Back in 2009, Berkshire Hathaway bought BNSF in the depths of the Great Recession for $44 billion. In 2009 BNSF earned $2.0 billion Net Income on $14.1 billion in Revenue.
Twelve years later, Berkshire Hathaway has received more in net profits from BNSF than it paid for the railroad. And they still own the railroad. Warren Buffett is playing with house money from here on out. Annual Net Income has increase to over $5 billion in a COVID-19 year and should exceed that considerably in future years.
If you take the $2 billion in 2009 Net Income divided by the $44 billion investment, BNSF was expecting at least 4.5% return on their $44 billion investment in the next year. BNSF quickly shot up to the $4 billion+ range of net income, and Berkshire Hathaway has been earning 10%+ annually on their $44 billion investment.
CP is paying $29 billion for a railroad that had $2.6 billion in Revenue and $619 million in Net Income in 2020. If you take the KCS $619 million 2020 Net Income and divide it by $29 billion, KCS would be expecting at least 2.1% return on their $29 billion investment in the next year. At just that rate it would take a long time for CP to earn back their original $29 billion investment.
This tells me that CP is buying at the high end of the market and it will take them more time for them to make their money back compared to BNSF.
Granted, CP is expecting synergies to grow net income, but it looks to me like they would need to have KCS contribute about $2.9 billion annually to Net Income to earn their investment back in the same time frame as BNSF did.
If there is $780 million in synergies, as referenced in the CP press release on the merger, adding that to $619 KCS Net Income in 2020 should be at least $1.399 billion in KCS-acquisition-generated contribution to Net Income in the first year of merged operations. That would get the time frame to CP making it's money back to 21 years, which is a shorter time frame but still many more years than it took Berkshire Hathaway to make its money back.
Perhaps that is why the CP stock price is down.
Granted, there is more at play here than CP getting their investment back, such as stock appreciation to enable exercising stock options, but relative purchase price and payback periods are also factors.
CPKC will most assuredly have Net Income each year, but it seems they have some heavy lifting to do to make back their $29 billion investment in as short a time frame as Berkshire Hathaway made back their $44 billion investment.
Of course, that is the goal of the merger and I hope they have great success in doing just that.
kgbw:That was a great analysis.
One must remember that Berkshire Hathaway purchased BNSF when it was on sale. The year 2009 was a great time to purchase great companies. I keep thinking of Warren Buffett's famous quote - "it is better to buy a great company at a good price rather than a good company at a great price." One must wonder if CP is buying a good company at a steep price. The timing is the opposite of 2009. Not much is on sale.
Does anyone know how much moves internationally between Mexico and US? Best case scenario, how much of that would CP gain? Does that justify the price paid?Ed
CP's main competitor (other than trucks) is CN. CP's move can be viewed as an over-due defensive move against CN's taking control of IC. And CN has yet to develop full use of that move.
MP173Does anyone know how much moves internationally between Mexico and US? Best case scenario, how much of that would CP gain? Does that justify the price paid?
Um, I agree that is all the press mentioned in their articles. However, CP just gained the full shipment of oil from well to refinery for North Dakota and Tar Sands Project in Alberta. Additionally, KCS had deals with BNSF to West Coast ports in United States and add to that the Mexican Pacific Ports. Plus you also have the Canadian Auto Plants pulling parts out of Mexico. Not to mention grain shipments to Gulf Coast Ports like CN has. I think it will be a fairly substantial boost to revenue over the next 10 years.
They also stated a chunk of the acquisition debt is temporary and will be gone in 4-5 years. So look for some asset sales with ancillary properties KCS has. I would guess they would sell the Panama Canal Railway for starters.
daveklepper CP's main competitor (other than trucks) is CN. CP's move can be viewed as an over-due defensive move against CN's taking control of IC. And CN has yet to develop full use of that move.
Agree 100%. CP executes faster with it's plans vs CN.
ns145CP's KC-Chicago and KC-Twin Cities routes are very circuitous as well as capacity-constrained.
With Chicago to Springfield, IL trackage rights they have a second line into KC from the upper Midwest. My guess is they might set that up as well. Time will tell.
Will be interesting to see how CN responds. They currently interchange with KCS and will probably want to continue that relationship post CP- KCS merger.
Lots of other opportunites that don't involve a merger with another railroad.. like perhaps buying an intermodal marketing company or a carrier like JB Hunt. This would likely sidestep the difficulty of merging two class 1 railroads while buying into new markets and into the retail part of the business. A class 1 railroad and JB Hunt merger? Wow.. that would be transformative!
I cannot see the government approving CP/KCS buying a company like J. B. Hunt since that would shut out other railroads moving north south traffic out of Chicago and KC. UP and BNSF run from Chicago to KC, Memphis, New Orleans, into Texas and Mexico. OOPS, restraint of compteition for my shipment!!!
The official STB filing hit late Monday morning (Docket FD-36500)...The usual whiners have queue'd-up to object. The interesting part will be when the other railroads and Justice start filing their remarks.
STB "cleared the decks" for this thing. Covid and limited staffing is going to have an effect on what comes next. (a project I am working on got parked for a while while they scramble to set this thing up and get it running)... It would appear reaction time and responses are going to be a dragged-out affair until Washington DC's internal everyday machinery can get back to new-normal after vaccinations happen.
You are correct, it normally takes quite a while for the STB to rule on any docket. With the Covid slowdown do not expect any decision for a long time.
Caldreamer
I believe CP acquiring KCS at this time is a result of President Biden killing the Keystone XL pipeline.
https://globalnews.ca/news/7715550/cp-rail-kcs-bitumen-transport/
Dale:
Great point....and welcome back! Missed your commentary.
Ed
nanaimo73 I believe CP acquiring KCS at this time is a result of President Biden killing the Keystone XL pipeline.
This Bitumen deal was in the works before anyone knew that Biden would be elected. The contract was signed in October and had been in negotiation for several months. The trains haven't started moving yet because USD Group's facility in Port Arthur to steam and empty the tank cars won't be finished until June 2021.
Hey Ed, good to see you!
John, my thought would be that CP now knows Keystone XL is dead, and they see the opportunity to increase shipments of Alberta and North Dakota oil to Texas.
I'd think it unlikely that they could have decided on a merger plan than quickly in response to something like that? My guess is it has been in the works for some time.
I wouldn't panic about your last chance to shoot pics of KCS stuff, given there's still engines (and cabooses) wearing Soo Line paint in use after all these years.
nanaimo73 Hey Ed, good to see you! John, my thought would be that CP now knows Keystone XL is dead, and they see the opportunity to increase shipments of Alberta and North Dakota oil to Texas.
Thanks to Chris / CopCarSS for my avatar.
Yes, welcome back, Dale. The Keystone XL situation might have made this the right time to make this announcement, but this was in the works ever since CP doled out $1.48 billion for the DM&E and IC&E in 2008. At the time, there was speculation that CP wanted DM&E to access coal in the Powder River Basin, but for the same reason that no one stepped forward to finance the DM&E expansion into the PRB, CP had such desire. With CP's "route envy" of CN firmly in place, the prize was the line to Kansas City and coveted KCS interchange. The Great Recession happened in 2008, so that probably delayed CP's interest in KCS, as well as needing to spend capital on infrastructure across North Dakota and Minnesota due to the Bakken Boom. CP jettisoned most of the DM&E in 2014.
We'll see how the CP does with the long haul of the bitumen from Alberta, which costs a lot of money to extract. Shippers determine the routing and CP's railroad from River Jct. (La Crescent, MN) to Kansas City doesn't have a lot of capacity, and the KCS is a lot steeper between Joplin, MO and Mena, AR than the BNSF alternative (BNSF had been getting these trains from CP at Noyes, MN in years past). At least on BNSF, most North Dakota crude is going west.
An interesting take on the "KXL": https://www.oilsandsmagazine.com/news/2021/1/23/ten-reasons-why-keystone-xl-doesnt-matter-so-much-any-more
In September, 2020, I visited Gascoyne, ND where a huge amount of KXL pipe is stored. The pipe has been there for at least 5 years, and arrived by rail (BNSF's ex-MILW main line between Aberdeen and Terry). Gascoyne was once the location of a lignite (shitty coal) mine that shipped to the Big Stone City coal plant at Big Stone City, SD. The power plant is still there (uses Powder River Basin coal now), but no trace of the lignite "mine" which was just a strip. The loop track is still there, and the pipe is piled next to it, visible on Google Earth:
https://www.google.com/maps/@46.1250077,-103.0567691,1483m/data=!3m1!1e3
Mark Meyer
Hey Murphy! Life is good (except for the Canucks lol).
Mark, thanks for that link!
It is interesting how CP, prior to this new merger proposal, was piecing back together the Midwestern extensions of the Milwaukee Road that were spun off by prior CP management teams.
IMRL was, of course, all Milwaukee Road. And while not quite the Louisville extension, the CP trackage rights deal for intermodal in to southwestern Ohio somewhat mimics the Louisville extension in that it is an attempt to serve the lower Ohio River Valley, as well as central Ohio, of course.
Then add in the buy back of former CP trackage in Maine (CM&Q) and CP has spent a lot of money buying back routes it once owned.
However, I would suspect they have kept the paper corporations intact so they can continue with the lower-cost operating structure on those line segments.
Is CP moving intermodal to the Southern Ohio area? At one time it was planned that service would be via CFE in Chicago. I live a few miles from CFE in NW Indiana and have not seen any intermodal on the CFE.
CP does service the North Baltimore CSX intermodal terminal. CSX operates CP trains 142/143 between Schiller Park, Il and Montreal. These are CSX trains Q166 and 165. These appear to work at North Baltimore with drops of containers, at least on the EB moves.
Has this perhaps substituted for the CFE service? Perhaps I need to go watch the CFE trains.
ed
I have to admit I am not sure if it ever took off. The service was announced (in 2019 or so?) with great fanfare by CP.
This network map from 2020 has Jeffersonville and the CFE trackage rights on it:
https://www.cpr.ca/en/choose-rail-site/Documents/cp-network-map-2020.pdf
Our community is FREE to join. To participate you must either login or register for an account.