Greetings;
CN refiled its Voting Trust application and all four main-stage players (CNI, KSU, CP & the STB) spoke
today at an analyst conference, a surreal and at times uncomfortable zoom experience….Not much is
anything was resolved but positions and underlying assumptions were clarified or exposed – some that
make me worry that we’ll look back and say “I know what you did last summer”! There was much more
from the (two) conference(s) today, and we will get to that ASAP; but first the takeaways:
- Well, that looked awkward! CN & KSU appeared together for the first time to advocate for their
merger agreement and it was hardly seamless – though the lack of rehearsal time, the physical
distance, and zooms in general (with the inability of multiple people to talk at once, etc) and
minor technological issues today clearly exacerbated the “arranged marriage” aspect of the
call. The newco will be called CN Railway – that was one revelation if only a symbolic one. But
there was some news:- CN agreed to sell 70 miles of track in Louisiana and “preserve all gateways”. The devil
remains in the details, and at 367 pages, there is a lot of room in the re-filed VT
application for details, after the two conferences today. Well-known consultant Bill
Rennicke worked on their behalf to identify competitive issues and helped them reach
the conclusion that this satisfies (or will) those issues that concern the STB; but clearly
the gap between CN’s idea of a competitive issue and CP’s remains…. - They applied for the so-called “plain vanilla” trust led by ex-KSU CEO Dave Starling
- They intend the maintain an Investment Grade Rating during and after the VT–backed
up by opinions from the rating agencies and a direct answer to concerns raised by CP
and echoed by the STB…. - They didn’t opine on satisfying the uncertain “public interest” section of their VT (beyond
the application), nor what got them to this arranged marriage from the former
engagement (KSU CEO Pat Ottensmeyer reminded me of Mark McGuire when saying
that he wanted to focus his remarks “on the path forward”, not the past – but unlike
Big Mac he did allow the proxy statement to be issued in “the next few weeks” will
cover the history of the affair/end of the affair between KSU and all of its suitors- They combined answers on single-line versus interline were interesting if not
fully fleshed out – for intermodal, the amount of philosophical, network and
financial trust to work out is significant in a partnership, they stated (but in
regarding the premium east-west IM, I believe that is the best example of
successful interline operations (think UPS, of JBHT, transloaded 53’s from Cali to
Harrisburg or whatever….)
- They combined answers on single-line versus interline were interesting if not
- CN agreed to sell 70 miles of track in Louisiana and “preserve all gateways”. The devil
- They say that looks (or rail competitive data) don't count for much, if so, there goes your
proof….so – I thought CP’s CEO Keith Creel was going to go all Joe Jackson on us (“Are they rally
gonna merge with him? Are they really going to combine with them tonight?” – or insert any
‘60s girl group lyrics…..). So, after CN & KSU, it was CP’s party, and they didn’t cry even if they
wanted to; in fact, Creel was at his most measured in what has been at times an emotional rollercoaster. He continued his company’s political strategy aimed at the STB (“the key”), the uncharted territory that they are all in (and which they mean to claim as their own) and the
other stakeholders beyond investors….in fact, while admitting that no one yet knows the true
meaning of “public interest” as it applies to the VT versus/and the merger review (a critical
undetermined issue), he calmly reiterated and expanded CP’s case:- The newest part of the CP strategy was the emphasis on the non-shareholder
stakeholders – reading the STB like a riverboat gambler (see yesterday’s note and below)
by appealing to US rail interests and “not just to shareholders”. - He emphasized CP’s development of new capacity (CN would focus on the IC)
- CP in fact has greater synergies due to route-mile advantages bypassing Chicago from
the east (turning what was heretofore considered a weakness into a strength) - CP emphasized its own, standalone opportunities (“we’ll still be here”) while noting that
a successful CN-KSU deal will mean that the STB has, in fact, created a roadmap for
future M&A (“an undeniable fact”)
- The newest part of the CP strategy was the emphasis on the non-shareholder
- The STB is hardly the Quiet Place (neither part 1 nor 2) – but in listening to Chairman Martin
Oberman speak (again, to a private audience to which I was, this time, invited), a certain horrific
dread began to encroach my thoughts….The Chairman acknowledged the unprecedented nature
of this (“new rules”) process, not to mention the delicate nature of opining in cases still before
the Board; that while DoJ (and DoT) are interested parties who can offer comments (as can
anyone), the STB alone will be the final judge and jury. So, consider (again – see attached) the
following thoughts:- “what has impressed me about the railroads is the lack of competition” – and, “railroads
are highly monopolistic” - by which he clearly meant rail-to-rail, ignoring the nationally
subsidized (if still poorly graded by the ASCE) highway and waterway systems. Those
modes are known to shippers…. - (In response to an issue of a Big 4 carrier using the new “roadmap” to which Creel
alluded to merge to counter coming EV/AV existential threats) “Why would a
combination lead to more volume?” - see CN’s comments on single-line intermodal! - “Railroads are a regulated industry” – huh, what’s with the celebrations over the 40th
anniversary of Staggers about? In truth, rails are really a partially de-regulated industry,
with chemicals, grain, and coal under (STB) regulatory purview – when they aren’t
contracted. The regulatory portion is de facto shrinking, and the completely unregulated
portion (intermodal!) is – by far – the fastest-growing segment! - And in fact, noting those threats from technology, “railroads ought to be focusing not on
mergers but on their own technological advancement” (although he noted BNSF’s
moving-block work) – however –- This goes against what I think is the 2nd of the three-part rail goals in PSR 2.0 etc
(“growth/tech/ESG”) - And was said at the same time as Progressive Railroading (and later myself) are
hosting “Rail Summit: IT Advancements….” at which CN’s CIO highlighted their
transition to the DSR (Digitally Scheduled Railroad).
- This goes against what I think is the 2nd of the three-part rail goals in PSR 2.0 etc
- The Chairman further went on to discuss the Wall Street factor, or “Investors Influence”
(remember investors = owners) and the over-importance as he sees it in (cost-driven) OR
improvement and share prices and share buybacks (often, it was stated, fueled by debt-
“Is it healthy to borrow money for stock buybacks?”) – “an area of significant concern”
deserving of further exploration….gulp. Look at the rails capital intensity, 21st C record
on Capex, safety record, ASCE grade, etc! In addition, rails financial condition is a major
source of strength, NOT risk.- One can see the influence of the Chairman’s thoughts in the responses of the
two competitors for KSU’s hand:- CNI emphasizing retaining/maintaining its Investment Grade!
- CP emphasized stakeholders “not just shareholders” (emphasis mine)
- This may require “The Exorcist”….
- One can see the influence of the Chairman’s thoughts in the responses of the
- “what has impressed me about the railroads is the lack of competition” – and, “railroads
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18