How can CN be so sure that their plan will be approved by the STB? The STB could decline the deal, and then what? I see this a a $2 billion dollar gamble. If the merger is nixed CP will come back to the table with their original offer to KCS.. could be a huge win for CP as they would also collect the $700 million from CN.
I feel like CP is far too confident that the STB will shoot down CN's deal. CN's deal is likely to get approved as noted by analysts. All CP will be left with is a measly $700 million and comparitively small system with a debilitating gap between Chicago and Ontario. And unlike the destinct advantage of being north-south with reach into Mexico like KCS had as the smallest railroad, CP won't have any advantages. They would provide only weak competition.
wasd I feel like CP is far too confident that the STB will shoot down CN's deal. CN's deal is likely to get approved as noted by analysts. All CP will be left with is a measly $700 million and comparitively small system with a debilitating gap between Chicago and Ontario. And unlike the destinct advantage of being north-south with reach into Mexico like KCS had as the smallest railroad, CP won't have any advantages. They would provide only weak competition.
Perhaps CP is too confident, but they can't outbid CN. Their best chance is to convince the STB to deny the voting trust.
If the trust is approved CP can oppose the merger or attempt to negotiate with CN for part of KCS and/or trackage rights. If CN will not negotiate a deal acceptable to CP, they can oppose the merger.
If the trust is not approved, I don't think KCS is obligated to merge with CN. They would have to choose between a good payout from CP now (since the STB has already approved CP's voting trust) or a better payout from CN later, but only if the merger is approved.
I would suggest that maybe CN is being overconfident. I know the analysts think this will be approved, but Santa Fe and Southern Pacific thought their merger would be too. We are in uncharted territory with the new rules. I do think CN probably can get a merger with KCS approved, but it may require a lot of concessions to CP and possibly others.
I think CN and CP should split KCS, with CN getting the former Gateway Western and Mid-South, CP getting KC-NOLA, and the rest becoming a shared assets area. Other gateways with NS, CSX, UP and BNSF would need to remain open. This would meet the new requirement of increasing, rather than preserving, competition.
In CN's newest press release thay say that they will make $1 billion (presumably per year) through the synergies of single-line service between Mexico and Canada. If the deal goes through and CN wins KCS, CP should immediately approach UP and offer to allow UP to quote rates from the Mexican border to any point in Canada that CP serves or can reach through Interswitching, for CP's cost plus 5%. CP would accept interchange in Chicago or Minneapolis. This would severely limit CN's revenue that they need to service their new debt, and from CP's standpoint it's traffic they would have a hard time getting. I am sure UP will take actions to limit what traffic CN can steal from them through the STB.
wasdThe merger agreement between CN and KCS is now official which means that the merger is now likely to happen. As noted before, the merger is likely to receive regulatory approval. I think this makes official something that has been observed for a long time; CP is a glorified regional railroad with a poor reach. If I was CP, my next move would be to lobby to get the revenue bar raised in order to be classified as a class 2 rather than a class 1.
I disagree, first the doom and gloom on CP is completely unwarranted regardless of the outcome of this merger. If one were to believe the doom and gloom story line then by all measures UP should be kicking BNSF to the curb competitive wise because UP has the other half of the Mexican rail system and BNSF does not. Not happening though.
Second the fact that KCS board approved of the CN bid means nothing until it is rubber stamped by regulators whom stated they are concerned about the anti-competitive nature of the CN-KCS agreement. Wall Street analysts notwithstanding and if you paid attention to them CP stock is up and CN stock is down on the annoucement the KCS board approved of CN.....what does that say?
So I still think we need a regulatory approval here before we see the merger go through as proposed. Other scenarios could still happen. Regardless of the outcome, CP is not at all doomed.....that is just silly.
STB holds all the cards.
Never too old to have a happy childhood!
CMStPnP Very well put.....Am personally disappointed with the latest development today but it wasn't completely unexpected either. One thing that I found out today that I didn't know earlier is that the KCS Board - by law - HAD to accept the higher offer by CN or it would have been liable to a lawsuit. But with that said, CN undoubtedly faces a bigger uphill battle here than many people want to believe. The amended voting trust plan could easily be shot down on anticompetitive grounds and even if they DO get approval for that, then there's the matter of getting the actual merger itself through. STB in one scenario might approve it but with so many conditions that it becomes unacceptable to CN. But I strongly believe that, one way or another, CN will get shot down here at some point. The fundamental problem I have in all this is that I think one has to be asking himself just where is the fiduciary responsibility that CN (presumably) has to its stockholders? It's already effectively on the hook for a potential break-up fee with KCS if things do indeed unravel (two billion plus the cool 700 million break-up fee that KCS now has to pay CPRS). We've already seen what TCI has had to say about all this and I can't believe that there aren't others. wasd The merger agreement between CN and KCS is now official which means that the merger is now likely to happen. As noted before, the merger is likely to receive regulatory approval. I think this makes official something that has been observed for a long time; CP is a glorified regional railroad with a poor reach. If I was CP, my next move would be to lobby to get the revenue bar raised in order to be classified as a class 2 rather than a class 1. I disagree, first the doom and gloom on CP is completely unwarranted regardless of the outcome of this merger. If one were to believe the doom and gloom story line then by all measures UP should be kicking BNSF to the curb competitive wise because UP has the other half of the Mexican rail system and BNSF does not. Not happening though. Second the fact that KCS board approved of the CN bid means nothing until it is rubber stamped by regulators whom stated they are concerned about the anti-competitive nature of the CN-KCS agreement. Wall Street analysts notwithstanding and if you paid attention to them CP stock is up and CN stock is down on the annoucement the KCS board approved of CN.....what does that say? So I still think we need a regulatory approval here before we see the merger go through as proposed. Other scenarios could still happen. Regardless of the outcome, CP is not at all doomed.....that is just silly.
Very well put.....Am personally disappointed with the latest development today but it wasn't completely unexpected either. One thing that I found out today that I didn't know earlier is that the KCS Board - by law - HAD to accept the higher offer by CN or it would have been liable to a lawsuit. But with that said, CN undoubtedly faces a bigger uphill battle here than many people want to believe. The amended voting trust plan could easily be shot down on anticompetitive grounds and even if they DO get approval for that, then there's the matter of getting the actual merger itself through. STB in one scenario might approve it but with so many conditions that it becomes unacceptable to CN. But I strongly believe that, one way or another, CN will get shot down here at some point. The fundamental problem I have in all this is that I think one has to be asking himself just where is the fiduciary responsibility that CN (presumably) has to its stockholders? It's already effectively on the hook for a potential break-up fee with KCS if things do indeed unravel (two billion plus the cool 700 million break-up fee that KCS now has to pay CPRS). We've already seen what TCI has had to say about all this and I can't believe that there aren't others.
wasd The merger agreement between CN and KCS is now official which means that the merger is now likely to happen. As noted before, the merger is likely to receive regulatory approval. I think this makes official something that has been observed for a long time; CP is a glorified regional railroad with a poor reach. If I was CP, my next move would be to lobby to get the revenue bar raised in order to be classified as a class 2 rather than a class 1.
A wild card in the proposed CN/KCS marriage could be what conditions the STB decides to impose before approval is granted. We have seen the results in a small way with the stalled sale by CSX of their line through Massena, NY to Montreal to CN. A paper barrier was part of the deal that would forever prevent potential interchange by CN with an existing second railroad at the south end. The STB required elimination of that clause, and CSX is not prepared to do that.
The STB may impose pro-competitive conditions on the CN/KCS deal that cause CN to want to back out.
Anyway, it should be fascinating to watch developments over the next several years.
John
Surmising for the heck of it.
CP will get:
1. Ownership of the original KCS from KC to Shreveport and thence to New Orleans.
2. Trackage rights on CN from KC to Detroit via Springfield and Chicago.
3. Trackage rights Shreveport-Dallas and Shreveport-Houston.
If there are other concessions look for BNSF to offer big bucks to acquire Dallas-Meridian but with CP and CN trackage rights Shreveport-Dallas.
If the CN-KCS merger is approved then it will be the first such approval under the new much stricter STB rules. The STB will probably render a decision based not only on the merits of the CN-KCS deal but also on any implications a decison would have on possible future mergers. An approval with few conditions will open the flood gates to other mergers while an approval with many onerous conditions will give any future merger proponents pause for thought and careful reconsideration.
Things could really get ugly for CN if the STB allows the voting trust and subsequently denies the merger. CN wil then be forced to unload the KCS.. likely at a much lower price. That's what TCI was getting at in their letter to CN earlier this week. And.. CP will likely come back with their own proposal which is more likely to be approved under the old STB rules. Given this possible negative outcome, CN has bet the farm on the merger approval.. As a shareholder I hope their confidence in getting the needed approvals isn't misplaced.
It should be noted that regulatory bodies as a whole do not take too well to those who assume that approval will be granted. Note the disapproved ATSF/SP merger with the ICC and various antitrust issues with mergers in other industries.
kgbw49Surmising for the heck of it. CP will get: 1. Ownership of the original KCS from KC to Shreveport and thence to New Orleans. 2. Trackage rights on CN from KC to Detroit via Springfield and Chicago. 3. Trackage rights Shreveport-Dallas and Shreveport-Houston. If there are other concessions look for BNSF to offer big bucks to acquire Dallas-Meridian but with CP and CN trackage rights Shreveport-Dallas.
So your presumption is that NS, CSX and UP will not also jump in and protest? I have a feeling one or two of them will to see what they can get. Primarily NS, I would think would jump in and protest to see if it could grab some lines.
BaltACDSTB holds all the cards.
plus 10% for the big guy.....lol.
Oh, you bet they would! Agree 100%. I just threw some thoughts out there for conversation purposes. I do think the permutations are almost endless.
I still can't figure out offering $29 billion or $33 billion for a property that earned just $627 million net income in its best year of 2018.
Even if there really is $1 billion annually of synergies and that all drops to the bottom line, you still won't get your money back for 29 years or 33 years.
By comparison Berkshire Hathaway "made it's money back" after about 9 years from the date of the purchase of BNSF.
The other thing is there is no guarantee the government of Mexico will approve either CN or CP. I don't know what the deal is between KCS and government of Mexico. Might there be risk of the length of the KCSM lease being adjusted to a shorter period because of any change of ownership, or perhaps a renegotiation of terms of the lease to make of if greater benefit to Mexico?
That is a lot of risk for both $29 billion and $33 billion.
But add CN's (albeit declining) net earnings and things don't look quite so bad at roughly 3.5 billion total.
Yes, but the incremental gain still takes 33 years to earn back the initial investment.
That $1 billion if it all drops to the bottom line is a paltry 3% return on investment. Probably not enough to cover the interest expense on the debt. That is why it is so curious. There must be something else, right? One has to hope so!
Perhaps they expect the KCS purchase to drive disproportionately large earnings growth over the next five to ten years. In any case CN has some work to do to get its earnings growth back on track.. its been in a bit of slump compared to CP which has for the most part had healthy earnings growth over the past decade.
The whole thing looks very risky to me.. i.e. a good portion of the year's earnings could go up in smoke if the deal is nixed for any reason.. and that's just the entree. Oh well.. I would be happy to be proven wrong.. maybe this is a bold move which will somehow pan out..
kgbw49 That is a lot of risk for both $29 billion and $33 billion.
At least CP's offer was more stock and less cash (debt). Plus if the CP deal would end up being successful, CN will have contributed $700 million of the cash.
kgbw49Oh, you bet they would! Agree 100%. I just threw some thoughts out there for conversation purposes. I do think the permutations are almost endless. I still can't figure out offering $29 billion or $33 billion for a property that earned just $627 million net income in its best year of 2018. Even if there really is $1 billion annually of synergies aNS that all drops to the bottom line, you still won't get your money back for 29 years or 33 years. By comparison BNSF "made it's money back" after about 9 years.
Also, I believe there is some past history as well with Mexico. Southern Pacific de Mexico didn't do so well and SP hung unto the property long after it was obvious it was losing money. Did SP get their moneys worth in the sale to the Mexican government? I doubt it. Political winds can change in Mexico as well in regards to profitability of the property.
CN without a good Chicago-KC route makes KCS between KC and Shreveport kind of redundant perhaps? Will there be abandonments?
One guess to preserve and enhance competition as required by the new STB rules is KCS from KC to Shreveport to New Orleans would be acquired and run by another railroad. That would probably be one of many conditions the STB would set.
One additional point. If the STB denies the Voting Trust for CN, then CN is required by its agreement with KCS to either sweeten the deal by another $1 billion or walk away forfeiting $1.7 billion USD. KCS can choose to walk away if the Voting Trust is not approved, but it must refund the $700 million advance that was paid to CP and will not get the $1 billion additional from CN.
beaulieu, that is very interesting! It is clear from your post that KCS has done a good job protecting itself. it would seem if it does not walk away from CN it would get the $1.7 billion, which in turn would allow it to pay CN the $700 million and net the &1 billion.
On the other side of the coin, I am now wondering if KCS doesn't turn out to be worth more if it is "parted out"?
Probably not given the huge premiums both Canadian roads are willing to pay, but one could see four distinct parts of KCS going to two, three or four differenr Class I railroads, in theory at least.
Dividing KCS might be considered but there isn't a bidding war like NS and CSX for all of Conrail. The two bidders decided enough is enough and agreed to the division of Conrail. That isn't happening over KCS.
kgbw49 beaulieu, that is very interesting! It is clear from your post that KCS has done a good job protecting itself. it would seem if it does not walk away from CN it would get the $1.7 billion, which in turn would allow it to pay CN the $700 million and net the &1 billion.
I am not sure that you understand the money situation exactly.
If the Voting Trust is denied. CN owes KCS $1 billion and can choose to walk away forfeiting the $700 million advance too.
If the Voting Trust is denied KCS can walk away keeping CN's $1 billion, but must refund the $700 million leaving KCS with a net of $300 million.
If the Voting Trust is denied but neither CN nor KCS walks away, KCS shareholders keep the $1 billion as a sweetener.
If the Voting Trust is denied but the deal goes through KCS shareholders will get approx. $30.3 billion in cash and CN stock and CN will assume $3.7 billion in KCS debt, remember the $700 million was an advance that KCS has already received and forwarded to CP so that has already been paid.
If the Voting Trust is denied and then the deal is denied then KCS shareholders will keep the $1 billion cash from CN and will not have to repay the $700 million.
beaulieu, thanks for laying out all the permutations so clearly. Much appreciated!
CN will sell Baton Rouge-New Orleans line as part of merger application.
link to article.
https://www.railwayage.com/regulatory/cn-kcs-file-for-stb-voting-trust-approval/
CN and KCS are filing a proper application for their voting trust.
If CN is indeed able to acquire KCS, I think CP should fire Keith Creel for basically setting in motion the events that greatly weakened their competitive position. They could terminate his contract and pay the severance with part of the $700 million they received from CN.
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