KSU - Getting to Brass Tacks

Greetings;

The “War of the Words” may be entering a new, more decisive stage. Word is that, after access to their
data room, KSU has given CN a this-week deadline to make their final, post-due diligence, offer perhaps
as early as this week; KSU’s Board under this scenario would then vote midweek (~5/19-20). If they vote
in favor of CN (without STB or Voting Trust info/input), CP would see the details of that offer and have a
week (five business days) to respond. The KSU board, in their fiduciary duty, must look at the total value
of the (any) deal – taking into consideration the cash/stock split, time, and risk...And, as the clock on the
CN’s Voting Trust (VT) approval hasn’t even started yet (needing a required public commentary period,
which I am told is “usually” ~20 days....we may see big, perhaps final, decisions sooner than I had
expected. Big for sure; final – we’ll see...

From the Tweets:

LAST WEEK (5/6): CP’s (exempt) deal for KSU gets its approval for its old-rules version Voting Trust (NO surprise); next up from the STB is its conclusion that the CN proposed deal is under the new, non- exempt rules (uncontested) then...the Big One – the STB decision (& timing) of VT on CN’s “new rules” offer (NO precedent). If CN gets& soon, game over. There’s a non-zero/low odds chance that CP’s political tactic works & CN gets bad news from DC – but the timing from the STB (which officially isn’t concerned with investors and unofficially is not their friend., IMHO) possibly doesn’t come into play; some thought that the more “neutral” sounding language (“based solely on the specific facts....” etc) from the STB on the VT suggested two trusts (as opposed to the wording on earlier the approval of the CP deal’s exemption, which seemed to sound pro-CP to some). CP points to “Footnote 4” of the VT approval, however, which points out the (without precedent) public interest consideration of VTs under the New Rules...

Some recent timetable/commentary:

• 5/2 Buffett notes that (in his opinion) “there is no magic to the KCS”; he also named Greg Abel
  as his successor which will definitely have rail implications (for another note)
• 5/3 CN issues an “Open Letter to the KCS Community”
• 5/6 CN and CP announce another record Canadian grain haul; CN backs up their optimism by
  ordering 75 locos and 1000 new grain cars (interestingly they will be “Hecho en Mexico”; nice
  touch)
• 5/6 CP gets its VT; CN writes that it is encouraged by the language in the approval
• 5/7 The City of Barrington Illinois gets involved. Again. Against CN. Again. It’s like the Man
  never left us....but it does support the idea, pushed by CP, that Chicago will be a factor in a CN
  deal. We note that the Chairman of the STB is a former Alderman from...Chicago. And that CP
  would love CN’s access to and through the Hub City.
• 5/10 KSU urges its shareholders to reject TRC Capital’s unsolicited “mini-tender” for 500K of its
  shares (~0.55%) at a below-market price. I remain baffled...

To reiterate – Tony’s Top 10 on the KSU Deal:

1. The higher bid will win (taking in all of the factors – timing, risk, cash %, etc). As such, I would
   place my chips on CN, still....for now....
2. BUT, as I have said all along, there is a non-zero, possibly growing chance that CP’s political
   strategy will raise the understanding of risk and timing and lead to two separate reviews of VTs,
   and the offers.
3. AND I have no dog in the hunt – these are in many ways the three rails that I use as
   exemplars of a PSR 2.0 growth pivot and the three leaders have all been RailTrends Innovators of the Year (CN’s JJ this year), as well as the spiritual creators of all three, Hunter Harrison & Mike Haverty.
4. IMHO the STB is dealing in art, not science, despite the footnotes, etc – and they come with some biases:
   1. Wall Street is bad for railroads and (especially) their shipper/customers.
      1. Despite the Street supporting, banking, and investing in shipper industries.
      2. And that includes misunderstanding the role of current of potential Infrastructure/PE Fund investors, which CP has played up (note Brookfield’s ownership of GWR, still run by its management team, not a stockbroker).
   2. The Street corollary - the STB thinks PSR, even now, is bad
   3. STB thinks that E. Hunter Harrison is bad, and not just his legacy – he lives!
   4. The STB thinks that railroads have too much power relative to their stakeholders (excepting of course., their nefarious partners in crime, their owners)
   5. The STB would – again, IMHO – prefer no deal at all
   6. Mostly because the STB doesn’t want to see a “Final Round”, Big-4 E/W transcon merger (and to this I agree wholeheartedly!); of the seven major rail CEOs, only one rail is led by an advocate of such consolidation, and it’s CP (although over the last year plus Creel has said that PSR has pushed out any near term deal – for good reasons)
   7. The STB has a lot on its plate, including:
      1. A re-filed CSX-PAR application as a “significant” transaction (BTW word on the Street is that CSX paid ~$775mm/17X for the Pan Am)
      2. Amtrak has asked the STB to intervene (a keyword) with the CSX, and NSC, on a plan to bring back passenger service between NOLA & Mobile, only 144 miles but an interesting test case in of itself plus a renewed, Biden administration Amtrak, backed by $80B in possible infrastructure monies
      3. Regular business, including access, demurrage, the definition of “revenue adequacy”, etc etc.
5. That said, I believe that both deals on their own would have gotten STB approval under old or new rules (CN with more complications)
6. Any assets that CN would be required or wish to sell would be in high demand (other C1, short lines, PE, etc); as would an in-trust, still independent KSU in 2022....
7. CP is pursuing a political strategy (see above) – and is providing cover for the STB
8. CN is pursuing a counter-political strategy – backed by a $50/share higher bid
9. Both have been paying to their strengths, especially in the still only vaguely-defined synergies – CP to grain, energy, Alberta and the upper Midwest; CN in intermodal, smooth Chicago access, etc
10. Timing - ? Maybe coming more into focus?

ALSO TODAY: CSX to purchase a bulk/tank trucker (Quality Carriers, from its parent); my thoughts
immediately came to mind of bad rail-buys-truck deals like OVT/UNP (deep in the past)- but this is more
like the CN approach, in a "feed the (RR) beast" mode. Of course, CSX CEO Jim Foote was the CMO at
CN; in addition, this deal compliments CSX's strengths, particularly its Trans-Flo product. The devil's in
the details of course (and terms were undisclosed, natch) but this is pro-growth in spirit. We also note
that this multimodal chemical push would dovetail nicely with any assets for sale in the space, such as in
Louisiana...

Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18