Greetings!
Both sides in the Canadians (Pacific & National) brawl over Kansas City Southern got good news over the weekend, as we await CN’s earnings call and their chance at drama. This has been Shakespearean, or like Miller’s “All My Sons”, as former colleagues and brothers-in-arms duke it out in a “War of the Words” (or “War of the Alphabet” – CPKCS, CNKCS, STB, USMCA, etc – or a “Mexican Standoff” – or, perhaps best, “The Battle of Inconvenient Times” as major announcements occurred during the weekend, at dawn, and again over the weekend). CP’s last week was dramatic indeed:
“Investors, I AM Keith Creel (see below). And I see a whole army of my railroad folks here in defiance of tyranny. You have come to fight as free men, and free men you are. What would you do without freedom? Will you fight? Veteran soldier: Fight? Against the mighty CN? No, we will run; and we will live. Wallace: Aye, fight and you may die. Run and you’ll live — at least a while. And dying in your beds many years from now, would you be willing to trade all the days from this day to that for one chance, just one chance to come back here and tell our enemies that they may take our lives, and steal our deals, but they’ll never take our freedom!!!
Creel and crowd: Long live the Beaver!
/(Badly) Paraphrasing “Braveheart”
What do we expect from CNI and JJ? Calmer drama, but drama still: “We have before us an ordeal of the most grievous kind. We have before us many, many long months of struggle and of suffering. You ask, what is our policy? I will say: It is to wage war, by press release, customer approval, and with all our might and our larger financial capacity, and with all the strength that God can give us; to wage war against a monstrous tyranny never surpassed in the dark, lamentable catalog of Class One accusations. That is our policy. You ask, what is our aim? I can answer in one word: It is victory, victory at all costs, victory in spite of all terror, victory, however long and hard the (rail) road (and the overlap) maybe.”
/Worse paraphrase of the great Churchill (“Fight them on the beaches”) speech
Adrenaline Rush & Mixed Metaphors: OK, a movie about William Wallace isn’t up to the Shakespearean tease from “Henry V” in the subject line, and Hal was surely more respected by history than anyone with a blue face, but the CP (ostensibly) Q1/21 Earnings Presentation by CEO Keith Creel brought up all sorts of literary & theatrical comparisons (“All My Sons”? and all-male “Lear? Hunter as the ghost of Banquo?). In fact, standing alone, I would say that speech is one of the seminal works of railroad literature, along with “The Octopus”, “Railroader”, “The Men Who Loved Trains” and “The Last Spike”. I can only hope today lives up to the high standards set all week!
First from the Tweets:
RRs – Exciting, eh? Expect next week to be a bit revealing in DC (OK, the news came Friday night) for rails from KC (& Calgary & Montreal). Meanwhile, 4 RRs report sloppy first-quarter results, slightly below expectations (citing Vortex/fuel/etc). Essentially, they all did OK in somewhat difficult circumstances. However, they all reiterated their FY Guidance which is a sure positive for the rest of the year. Q4 will be the first quarterly comparison to make any difference, however. Bit it is worth noting that only CP improved OR – so far(and that includes its merger costs). Remember, comparisons are really meaningless. So - any impact on valuations? Fuhgeddaboudit! And Have a chat, eh? If you’re a DesJardins customer, the discussion between Benoit & myself (see attached) was taped; I also have my bi-annual NEARS “Jason & Tony Show) Thursday afternoon as well as a planned “Fireside Chat” with Keith Creel and Pat Ottensmeyer that I for one cannot believe the lawyers will allow...IN FACT, THEY WERE FORCED TO SPLIT THIS UP AND KSU’S OTTENESMEYER WILL SPEAK TOMORROW MORNING. In the fighting scenario, Pat & Co represent the RING, and if you saw the movies, the ring didn’t say much...
The CP strategy appears to be to hold the line on offering price (to save dry powder for investment – and they would have need of CAPEX) and to fight on a political, risk & regulatory front. To wit: Their deal is doable; their opponent is not (or at least is a great deal more complex. To that end, as a CP person said: “The (STB waiver) decision Friday sends a signal that our trust will have a lower burden of proof—don’t have to show that it’s in the “ public interest “ and has lots of precedents under those old rules...A merger under the new rules of course would have no precedent and must meet the public interest test. One could infer CN will be under the new rules and their trust not approved.” Would the STB (a FIFO-run body, remember) look at the two proposals under different sets of rules? To the astonishment of some observers, they seem to hint that they just might...CN’s strategy is clearer – we have a ($50/share!) higher offer outstanding and our deal will pass scrutiny (after considerations). And I agree with that (after considerations). CN proceeding under the new rules, splitting the regulatory baby. More to come...
KC’s “Truth”/William Wallace speech (and subsequent commentary lays this plan out. I have tried to summarize the various tens of “truths” onto a Top Ten, for my own clarification if nothing else:
- The CP proposal is the only Class One deal that meets the public interest conditions (and its corollary – is the only one that is “pro-competitive”).
- And another thing: “pro-competitive” also means “pro-service” (up the STB’s alley).
- Their deal is anti-competitive – much bigger than “65 miles near Baton Rouge and 5 customers” – look to Ag, autos, propane, etc.
- “There are no losers” in the CP deal – no railroad (or shipper, covered above) is significantly damaged by this proposal. I had thought so too – while waiting on granular numbers in the filing(s) – but CN clearly begs to differ....
- Recent track records in shareholder return place CP and KSU at the top – and CN at the bottom (ouch!).
- Unlocks investment versus an over-leveraged combination (this might hamstring further price movement from CP, but they have said they wouldn’t raise the bid, anyway though many think they have the wherewithal to do so, doing it now would undercut their political strategy). Again, CN would beg to differ 9and have less need for instant CAPEX depending on the imposed conditions).
- Unrealized value is still $0 – “fantasy money”/”fool’s gold” (double-ouch!).
- They are dumb (“haven’t done their research” or understood the markets) or (much worse) lying (they understand, they just are not saying). This is unusual in the (with apologies to Ms. Farmer) the “Gentleman’s Club” that has been my experience of railroading....
- They are not good at their jobs – not just shareholder value (above) but there are “No Pioneers (of PSR) Left (at CN)!!”
- And the biggie: MAD. Mutually Assured Destruction. Our deal provides rail network stability (2 smallest together still smallest; 2+2+2, KC happy and busy, etc). Their deal does not. It leaves 2+2=1 and little CP, all alone. And if left isolated I cannot promise I won’t upset the apple cart (look to merge east – NOTE – unlike what EHH tried to do, as I have repeatedly stated that was about injecting EHH & PSR into an eastern rail, not a merger to save a company). We know the STB doesn’t want that (de-stabilization) and that shippers really don’t want that.
We note that RailTrends Innovators of the Year count in all of the major players here –
Railroad Innovator Award
2021 - JJ Ruest, CN
2020 - Jim Foote, CSX
2019 - Pat Ottensmeyer, KCS
2018 - Ed Hamberger, AAR (on CP’s Board)
2017 - Jack Hellmann, Genesee & Wyoming
2016 - Claude Mongeau, CN
2015 - Michael Ward, CSX
2014 - Keith Creel, Canadian Pacific
2013 - Wick Moorman, NS
2012 - Jim Young, Union Pacific
2011 - Mike Haverty, KCS
2010 - Matt Rose, BNSF
2009 - Hunter Harrison, CN
A timeline of recent events is helpful for me to sort this out:
- 4/16 KSU reports.
- 4/20 CNI counterbid (“after years of study” stated their well-respected COO who has not been there for years).
- 4/20 CSX reports earnings (see the pattern from the tweet) in which CEO (ex-CN CMO, of course) Jim Foote says mergers have been the underpinning to the “railroad renaissance” – true of course, but those were economics-based” mergers and allowed investor naiveté to become clear (and as such a present danger):
- US valuations being raised.
- DoJ is a big deal in this regard.
- This is a precursor to CP+eastern rail (GRRRR) whereby the CP (in this argument “the tail”) is the buyer of the dog – market caps are as follows: KSU $27B; CP $49B – CN $77B. Eastern rails NSC $71B and CSX $78B (and for comparison’s sake UNP is $149B).
- “capacity shortage in the supply chain” could drive mergers – there – hear me - there is NO capacity shortage in the NA rail network (Creel: “I am not concerned about capacity” even in Chicago) as “capacity dividends from PSR and (soon) PTC have yet to play out.
- Transcon mergers are inherently not anticompetitive – ask the shippers, including big ones that usually sit on the sidelines (parcel carriers, IMCs, retail, e-commerce).
- 4/21 CP’s Braveheart and letter to the STB following CN’s letter to KSU/Pat O and their “pre-filing (“engaged to be engaged”).
- 4/22 (estimated) CN & Watco resolve shipper issues on the Wisconsin line sales (more “ghost of Hunter”) with the STB, clearing that pain point.
- 4/22 Union Pacific reports, and their CEO Lance Fritz opines cogently and forcefully against transcon mergers – their Investor Day 5/4 will be interesting in this (and of course all of the other) regard.
- 4/23 CN files another letter in defense of their proposal, noting they would still be only the 5th largest railroad in the USA (ahh, but #3 with a bullet in NA).
- 4/23 Congressman DeFazio, no railroad ally and Chairman of the House Transportation & Infrastructure Committee, opines “this should set off alarm bells” and rail mergers would damage the US economy (the STB, one presumes, listens....).
- 4/23 The STB finds that the waiver applies to the CP proposal (the combination would still rank #6, no overlapping routes - compared to a deal with ANY OTHER CARRIER) – goal Calgary!
- 4/24 CP reacts, sings “Oh Happy Day!”
- 4/24 KSU Board “determines that the proposal by CN would reasonably be expected to lead to ‘a superior proposal’” – NOTE THE VERY, VERY PRECISE WORDING. But they open their kimono...Goal Montreal! (but this goal was expected).
- 4/24 CN reacts (“looking forward o engaging with KCS” on “confirming due diligence”;
- 4/24 CP reacts to that reaction (KSU is simply meeting obligations” but asks (as have many others): is this merely an attempt to (er) derail CP+KSU? (to which I would counter-ask – how can they – CN – kill it without eating it?). and they further ask: why would KSU shareholders want CNI stock (pow! Bam!).
- 4/26 CN ALSO requests that former KSU CEO Dave Starling be their trustee, too; CP says “good on ya.”
- CN reports 409 letters of deal support from “stakeholders”; I believe that the last CP count was 415 shippers.
- CP sends a letter to KSU and CEO, (re) expressing the advantages/disadvantages of the two proposals as they see them; it’s not super-friendly concerning CN (“Either Mr. Ruest does not fully understand his proposed transaction, or he doesn’t want to reveal what he knows”). That....is....unprecedented? Unlike anything in my experience?
- 4/26 CNI Reports (and opines).
- 4/27 CP reacts (I promise you).
- 4/27 We react (ditto).
- Soon – STB and KSU decisions.
From Friday’s webinar - Some questions for you (me) received by DesJardin client/investors:
- What the STB’s’ criteria are for determining if the target can be placed into trust? Historically all of the targets were placed in a trust, even those with a GREAT DEAL of overlap (think UP+SP). But that was under the old rules; the new ones (public interest/enhanced competition) are unprecedented and (purposely?) vague.
- Whether a voting trust has been ever rejected and what the grounds were? Not (that I can recall) in a plain vanilla merger (and these are that!). Remember, the prior CP efforts at CSX and NSC are COMPLETELY DIFFERENT; if a VT is there to protect (the shippers of the) target RR, so that it proceeds normally during the review process, the STB knew that EHH would not do that with NCS or CSX....and also the Pan AM, a private company, wanted non-rail assets in its complex VT and that was rejected.
- I wonder if you could provide any color on where the CN concessions might be if they win the KSU bid? What are the focus points? It will be in access from the North to Louisiana, the ports of NOLA and Mobile, access to/though Memphis and or Jackson, etc.
If you need a laugh amidst all of this angst:
- Don’t shoot the messenger: https://www.facebook.com/railfanmag/posts/10158881822331075.
- Perhaps the two Canadian railways are fighting for an American & Mexican carrier because of
their shame regarding the Canadian Olympic uniform, a take on the “Canadian Tuxedo”? Team
Canada's Olympic Uniforms Are the Wrong Kind of Canadian Tuxedo (msn.com). - And then, as they say, there’s this: A Canadian MP accidentally appeared naked on an internal
parliamentary video feed (msn.com).
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18