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

[Anonymous]

These railroads would be a great fit. DME Coal and grain would funnel down south to kansas city and the KCS via cp and ice, also to the midwest. Canadian grain would travel to texas. Chemicals would go north. And the combined systems would compete well with the cn, up, and bnsf. The DME connects with CP in winona MN, The CP connects with the ICE (former CP) near Lacrosse WI, and the ICE connects with KCS in Kansas City.

[CSSHEGEWISCH]

DM&E and IC&E already share common ownership. Note that CP sold its 1/3 interest in I&M Rail Link when it was sold to Cedar American Holdings and became IC&E. As for CP + KCS, read the July issue of TRAINS.

[CopCarSS]

Please don't. I'm having a hard enough time stomaching the US Rail environment as it is right now. Especially with the Canadian Borg (CN) gobbling up everything interesting. Having another Canadian Railroad get into the game, and taking over some more railroads I enjoy railfanning might be more than I can take.

[gabe]

QUOTE: Originally posted by CopCarSS

Please don't. I'm having a hard enough time stomaching the US Rail environment as it is right now. Especially with the Canadian Borg (CN) gobbling up everything interesting. Having another Canadian Railroad get into the game, and taking over some more railroads I enjoy railfanning might be more than I can take.

I am not sure CN is truly a Canadian Railroad anymore . . .

Also, I am all for a KCS and DM&E/IC&E merger. I think that is the only way all three roads either survive or keep from being gobbled up by another Class 1. Of course, the Powder River Basin Coal would be a big plus for the KCS, but the Chicago access would be another helpful aspect.

Gabe

[Murphy Siding]

One little problem that I can see is that the DM&E does not now have, and might never have the Powder River coal traffic. There is the little matter of a little TWO BILLION DOLLAR expansion that has not yet gotten off the ground. The DM&E is still about 150 miles from the PRB. When and if it extends that 150 miles, and rebuilds the rest of it's track, it will be ready to compete for that business. I wouldn't bet the farm on that just yet.

[Anonymous]

IC&E/DM&E + KCS is a logical marriage, and would probably be the least objectionable to the Big 6, since they all would retain full interchange with this new Midwest powerhouse. It should be noted that DM&E already is in line to interchange grain with CP now that the BNSF vs State of South Dakota lawsuit has been ostensibly settled.

[CP5415]

[Anonymous]

First thing, This would keep CP from being odd one out in the merger game for sure, Second It would give DM&E greater opportunity for its future coal traffic and the market basis to get the credit to complete its extention,Thirdly IC&E and DM&E have already begun the work toward single ownership and operations, Fourthly KCS would have real connections from Mexico to the Far North over its own rails, and Fifthly it would show the world that immagination and guts will work out from little parts ito big ones. BUT THE TROUBLE OF IT IS------- It makes to good of an arguement, to much of a good business decision and to much sence to come about. BUT IF NOTHING DON'T HAPPEN and such conversations become serious and a merger comes to pass. The CP+IC&E+DM&E+KCS would combine into what could potentially become a real North American Powerhouse of the railroad business with of course all the proper things that are required to make it happen, like: good and strong management, reasonable labor rates and contracts, proper financial support, a good business plan, patient stockholders, a strong qualified engineering and marketing department and strong penetration of markets to be served. [2c]

[nanaimo73]

1-There is no benefit in this plan for Canadian Pacific shareholders. CP is doing fine and is an east-west carrier. Crowsnest coal goes across the Pacific, as does Potash and Sulphur. And "Canadian grain could go to Texas"? The Government of the United States preaches fair trade, but does not practice it. Just look at the softwood lumber war or listen to that Democratic Senator from Montana.

2-KCS is swimming over their head in debt from buying the Mexican track. Will they ever get the money to rebuild the Rosenberg to Victoria line ?

3-CP sold the IC&E trackage because they do not want it. It does not fit the vision of the men running the company, and they know how much traffic could move over this line.

4-DME is not going to get $2 billion for their line into the Powder River. And if they did, the distance from Bill to Kansas City would be 1,340 miles through Winona, or 746 miles over UP or 788 miles over BNSF. How is DME going to pay off the interest on the $2 billion when they are hauling coal twice as far ?

5-KCS is getting more coal now from BNSF than they would as a BNSF competitor.

Now, since it's not going to happen, I would rather hear everyone's views on which paint scheme this imaginary railroad would use, and what would it be called ?

CP5415-The law says CN's headquarters have to stay in Montreal. They could transfer the railway to a subsiduary and just have a few bigshots show up in Montreal for some meetings.Isn't the Union Pacific Corporation HQ in Allentown, PA ?

[gabe]

What is all this about the DM&E not being able to get the $2 Billion investment. I could have swore I read more than one article suggesting that it already had the investment secured. Furthermore, they spent a lot of money on environmental studies and lawyer fees if they didn't think they could get the investment.

I think a banker would be silly to invest the money myself, as Class 1s are starting to see problems with the Powder River Basin and making money with the competition that is already there.

Furthermore, I think the River Basin is the less important part of the merger. The more important part is KCS getting access to Chicago and Minneapolis. I don't know about the CP end, but I would have to think in terms of market perspective, DM&E + KCS helps KCS. Maybe it could be a true merger rather than an outright buyout?

Finally, I also know that neither railroad is going to do particularly well by themselves, surounded by giants as they are.

Gabe

[CopCarSS]

QUOTE: CN is & always will be a Canadian Railway as per Federal Canadian Law which is why the BNSF/CN merger was to be headquartered in Montreal.

Gordon

Don't you mean, MC, not CN? As in Molson Coors? Oh wait...that's something else. Never mind. Just a little perturbed at that merger, too. Kind of reminds me of CN taking over some of my favorite railroads. Anyways, back to your regularly scheduled programming.........

[nanaimo73]

CopCarSS-Don't worry, I believe Coors is going to be running the new company.
Gabe-The DME planned on building the new line and upgrading the rest of the system gradually. Almost every City or Town is now asking for bypasses and the cost of the project is spiraling out of control. Even if DME magically gets this incredible amount of cash, they will still be an east-west RR. KCS can not buy DME when they can't even afford to do the Rosenberg-Victoria project.

[gabe]

QUOTE: Originally posted by nanaimo73

CopCarSS-Don't worry, I believe Coors is going to be running the new company.
Gabe-The DME planned on building the new line and upgrading the rest of the system gradually. Almost every City or Town is now asking for bypasses and the cost of the project is spiraling out of control. Even if DME magically gets this incredible amount of cash, they will still be an east-west RR. KCS can not buy DME when they can't even afford to do the Rosenberg-Victoria project.

My understanding is that ALL environmental concerns have been addressed and DME now has a green light and that they had the 2 Billion financed from teh beginning.

Finally, not every merger constitutes a buyout. I do not see why KCS needs to buyout DME.

Gabe

[nanaimo73]

Gabe, a merger where DME shareholders exchange their DME stock for new KCS stock would work for KCS. I do not know how it would effect existing KCS stock. I don't think a majority of DME shareholders would approve.
I don't see any benefit to DME in merging with KCS.DME is set up to send traffic east.
www.dmerail.com

KCS could have bought just the line to Chicago from CP when I&MRL was formed or when I&MRL was sold. I think all they care about now is getting traffic through south Texas.The August 2003 Trains has a good article about this.

[gabe]

QUOTE: Originally posted by nanaimo73

Gabe, a merger where DME shareholders exchange their DME stock for new KCS stock would work for KCS. I do not know how it would effect existing KCS stock. I don't think a majority of DME shareholders would approve.
I don't see any benefit to DME in merging with KCS.DME is set up to send traffic east.
www.dmerail.com

KCS could have bought just the line to Chicago from CP when I&MRL was formed or when I&MRL was sold. I think all they care about now is getting traffic through south Texas.The August 2003 Trains has a good article about this.

From what I have read, getting traffic to Chicago is more important to KCS today than it was when KCS had that option previously. I am not so sure DME would find no advantages for a KCS merger, it would open the grain on the line to better South of the border access, and KCS has 8 power plants that are capable of burning Powder River Basin Coal.

Gabe

[Murphy Siding]

Gabe, the DM&E has jumped through most all of the environmental hoops to get approval for the PRB line. They do not have the 2 BILLION dollars in financing lined up. I have a hard time seeing how they will get this done. Convetional wisdom, ( and certain people's fertile imagination) say that the DM&E simply has to build a new line into the PRB, set their rates 1cent lower than BNSF and UP, and everyone will live happily ever after. If, as some believe, BNSF and UP are making such huge margins on the coal now, they could just lower their rates to "be competitive " and kill the DM&E on the vine. How do you get the financing based on that grand scenario?

[gabe]

MS,

I am not disagreeing with your sylogism. However, I am not arguing sylogistically. I am saying (1) DME has spent a heck of a lot of money relying on the financing being there--they are going to look awfully stupid if it is not (2) when the report was first released, it was noted that the financing was in place.

I, also, question the decision to finance such construction. But, I think I am going to rely on DME's assertions.

I wouldn't be surprised if power companies might be lubricating the financing.

Gabe

[zardoz]

QUOTE: Originally posted by nanaimo73
Now, since it's not going to happen, I would rather hear everyone's views on which paint scheme this imaginary railroad would use, and what would it be called ?

CP+ICE+DME+KCS

Let's see; How about:
The Pacific, Midwest, & Southern RR
The Canada, Kansas, & Midwest RR
Canadian Southern
The NAFTA RR

The locomotives would be painted with a white nose, red lower-half carbody, blue upper-half carbody, green reflectorized striping, lettering, and accents.

The management and some employees would have to be tri-lingual (French, English, and Spanish).

[Murphy Siding]

Gabe: I had to look up sylogism in the dictionary just to see what it is we're discussing. My comments weren't aimed at you by the way. My office sits 200 yards from the DM&E offices in Sioux Falls. Locally, we hear a lot of news about the DM&E. So I must chuckle now and then when people suggest it being part of a grand new merger scheme, considering where it is now,and where it hopes to go in the future. For what it's worth, as I sit at home right now, I can hear the horn of 2 Geeps from the Ellis & Eastern Railroad crossing 3 blocks from my house on the old C&NW line. I'd type a happy face, if I had any clue how!

[Anonymous]

From what I understand, the DM&E project is backed by Midwest power entities, who apparently want a dependable PRB coal supplier without all the sudden price gouging currently being parlayed by BNSF and UP. The distance from mine to power plant is of a lesser concern than the long term delivered pricing of the PRB coal, so a KCS backing isn't out of the question either.

[Murphy Siding]

Future Model: I wouldn't doubt that Midwest power entities would welcome the thought of the third railroad shipping from the PRB. It's unclear if any of them have actually backed this project. ( As in "put your money where your mouth is"). But, please explain how having 3 railroad choices is going to be any more competitive than 2 ? Also. isn't the DM&E, with 2 billion dollars in new debt going to have a harder time "being competitive" than 2 existing lines with a lot lower overhead costs?

[nanaimo73]

Gabe-I think it is fair to call this a $! billion project that NIMBY's have changed into a $2 billion project. I think they have killed the project for good. DME seems to be more concerned now with fighting UP over the track in Owatonna Minnesota, where the east-west DME line crosses the north-south IC&E line. DME is running on 3 miles of trackage rights here that C&NW designed to keep DME captive.
Murphy Siding-I'll do something about the shrinking number of class ones in a few weeks.And if you want to put a smile in,
[:)] just click on the show smile list to the left.

[Anonymous]

DM&E would be competitive by moving PRB coal to Chicago to interchange with CSX and NS as demand for PRB coal increases in the east.

As for the merger scenerio of CP+IC&E+DM&E+KCS, it just doesn't match up. KCS will more than likely be next but to who??? Your guess is as ggod as mine. IC&E would be more attractive to Rail America or Genesee & Wyoming, both of these shortline portfolio companies wouldn't mind adding IC&E to their books. DM&E might be attractive to an eastern road as a means to get directly into the PRB, say NS+DM&E? NS is built on coal and the DM&E might be more attractive than KCS or CP since it is so much smaller.

But that's just my 2 cents worth......

[daveklepper]

My only comment at this time is that both CN and CP have USA shareholders. Sme reports are that CN actually has more USA than Canadian!

[Murphy Siding]

nanaimo 73 [:)] ?

[MP173]

can anyone address the pricing of Powder River Coal? It is my understanding that in the early years, it was extremely lucrative to BN and CNW/UP. That high rate of return was no doubt necessary to build up the infrastructure.

My impression is that PRC is not what it used to be. A comment here, a comment there gives me that impression. Add a third routing and suddenly not only will UP and BNSF rates fall, but also the return for DME will fall.

$2billion of debt is a lot to service on low rated coal.

ed

[gabe]

I have read several articles to that effect Ed, and I agree with your conclusion. I think that shows who is really behind pushing this deal.

Gabe

[SALfan]

QUOTE: Originally posted by MP173

can anyone address the pricing of Powder River Coal? It is my understanding that in the early years, it was extremely lucrative to BN and CNW/UP. That high rate of return was no doubt necessary to build up the infrastructure.

My impression is that PRC is not what it used to be. A comment here, a comment there gives me that impression. Add a third routing and suddenly not only will UP and BNSF rates fall, but also the return for DME will fall.

$2billion of debt is a lot to service on low rated coal.

ed

At least for the first several years, PRB coal was NOT a big moneymaker for (then) BN because of the massive capital investment required for track, locomotives and cars. There was a TRAINS article about 7 to 10 years (IIRC) after BN started hauling PRB coal which said that overall BN at that time had not made any money on the stuff. There was an article within the past five years that said rates were about to go up for a number of utilities because the initial contracts were about to expire; the original deal was for the utilities to buy the cars (because BN couldn't afford them) and in return the utilities got a very low freight rate.

[Anonymous]

QUOTE: Originally posted by Murphy Siding

Future Model: I wouldn't doubt that Midwest power entities would welcome the thought of the third railroad shipping from the PRB. It's unclear if any of them have actually backed this project. ( As in "put your money where your mouth is"). But, please explain how having 3 railroad choices is going to be any more competitive than 2 ? Also. isn't the DM&E, with 2 billion dollars in new debt going to have a harder time "being competitive" than 2 existing lines with a lot lower overhead costs?

It's about control. By having a stake in the DM&E expansion, the utilities can exert some influence in the ways and means of coal delivery. It therefore doesn't matter if there is suddenly "too much compeitition" because if push comes to shove the utilities have DM&E's back. Naturally this begs the question "why not just buy into BNSF or UP?". Because the purchase price for having sufficient say in matters is cheaper with the smaller domestically owned DM&E than with the multinational corporations like BNSF and UP. That doesn't mean that these utilities won't drop DM&E like a rock if BNSF or UP come up with a long term "sweetener" deal.

BTW, the $2 billion doesn't necessarily imply debt, a good part of that could be equity.

As for 3 choices being better than 2, I read an economic analysis on monopolies in which they rated the degree to which the monopolists prices compared with true competitive prices. For monopolists, it was something like an 86% average price differential. For duopololists, it was around 60%. However, for triopolists the price differential was only a few percentage points difference, something like 16% at most if I remember correctly, and as such it was determined that there was no statistically significant difference between triopoly pricing and true competitive pricing. Thus, assuming the utilities would go for whoever offered the lowest shipping price regardless of ownership alliances, they would have a nearly competitive transport market from which to choose. How this would fly against the railroad stand (or is it a railroad myth?) that they need revenues of 150% or so of variable costs to be judged "profitable", is not something to which I have the relevent insider information, so it's hard to say if railroading could survive in a triopoly environment or not.

[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?