Greetings;
Here are more thoughts on the proposed CP/KSU combination, and an attached slide deck supporting
my investor call with Scotia, earlier today: A Railroad Industry Expert’s View on the Merger Between CP
Rail and Kansas City Southern (vidyard.com). I also had a chat with Pat Foran of Progressive Railroading
and the new RailPRIME, so if you are a subscriber (and shouldn’t you be?) here is that LINK.
April, No Fooling: The next key date is April 1 (or the days leading up to it) for opposition to reveal itself;
it’s ironic because on midnight Saturday when I first saw the breaking news, it came with a clear untruth
(that the STB had “pre-approved” the deal) – that mistake was corrected but made me think, not
knowing what day it was (pandemic and all that) that is was perhaps an April Fool’s joke? It wasn’t, of
course, so I began to think through the implications, and if you want the summary without having to
work too hard, it’s here:
Some more thoughts, some profound, perhaps, others definitely not so much:
- Regarding the Ag franchise and how the deal might hurt the BNSF and/or the UP, the smartest guy I know in grain transport said, regarding the proposed deal (henceforth “the deal”) he does “not think that the merger materially impacts net grain origination for the UP and BNSF, especially for the Mexico and Texas Gulf destinations. It becomes a loss-leader fight because the KCS has such a roundabout and costly access to their Mexico franchise. Net, does the CP origination change anything? I do not think so because nothing changes with regard to Texas Gulf and/or Mexico destinations.”
- Regarding Mexico the greatest opportunity, which is bigger but doesn’t preclude the biggest risk
– in a word AMLO. The FT’s “Big Read” on Mexico yesterday noted that he seemed to be “in
love with bad ideas” (notably his uncritical and uneconomical support for Pemex) and, from
Citigroup, “fully committed to creating the economy of the 20th century”.
- Approval should be obvious – what’s changed south of the border, except probably
more Canadian operations expertise on top of the (at least) 3 ex-CN guys down there?
But at least a couple of rail experts I have asked bout the deal suggest that Mexico
regulators just might be an issue. Countering that we note that two high government
economic officials – the Undersecretary of the economy (& Trade) and that of North
America retweeted the deal news with positive commentary. My sources there also
note that AMLO is counting on USMCA benefits to prop up his ailing economy (but if
that doesn’t work, will it be “Gringos Go Home”?).
- Regarding the exclusivity, FXE was able to negotiate the extension of their own rights by
promising infrastructure CAPEX – that deal is open to KSU which has 6 years to
negotiate….
- Many have reported that this is the third time that CP tried to buy a US (based) carrier but:
- Technically that’s not true as both efforts at CSX and NSC were really “trial balloon” that
never got to the STB judgment stage
- Both were really about “injecting” Hunter Harrison into what he perceived to be a
flailing US railroad; by bringing along his company (CP) he ensured that it wouldn’t work
as all of the stakeholders save one were adamantly against it. So the deals didn’t even
proceed to the regulatory stage –
- Which is something to think about when looking at Voting Trusts. Like the Pan Am deal,
this (CP+Eastern RR) was unusual – the value creation was almost entirely in the
changing of the target (bringing PSR to the unbelievers, and EHH to America – see
below), not the market extension (all protests to the contrary). The STB saw through
that….but this one, while new in that it is so predominantly synergy-based, is also
traditional in terms of VT – and with ex-KSU CEO David Starling as Trust head, (and trusted) they found the perfect man….
- By de-linking with CP, he was able to, with Mantle Ridge, start a proxy battle were the
only stakeholder group 100% behind him – shareholders – were the only votes that
counted (something the STB said at 2018 RailTrends was something they might try to
change in the future! But his actions at CSX – bringing PSR on a hyper-speed, may have
been ultimately successful in setting up the CSX of today, but further pushed the STB
into its current stance….
- Lots of business/general/trade press linking this deal to the USMCA (true but that was really a
restoration of NAFTA) and the pandemic recovery….really? So, spend $25B for a good outlook in
2022? And the press says the financial community is short-term oriented!
- Why now has been a recurring question, and I wonder if the rumors that a second financial
(assume Infrastructure, perhaps the same partnership) bid came to KSU?
- As with Pan Am, earlier deal-making by NSC has left them in a solid negotiating position, in that
case with PAS and in this one with the Meridian Speedway. By cutting that deal in the early
post-moratorium days, NSC ensured a critical E/W route would be retained, cementing the JV
with CAPEX.
- In addition, CP’s CEO Keith Creel has had a few years to complete his re-engagement with
stakeholders he acknowledged were perhaps ignored in CP’s inward PSR/restructuring period,
before the outward-focused “pivot to growth”. This will hold him and CP in good stead as those groups included not just shippers but labor, etc. Already Canadian politicians and trade
associations are seemingly falling into place behind the deal.
- As you can probably deduce, I am positively inclined toward the deal, and although we lack the
numbers (anticipated unit/revenue opportunities drilled down) that the Canadians have been so
good to give us at their Investor Days (and KSU did with their “bubble charts”), it’s pretty clear
that the synergy estimates are conservative. CP will I believe be able to show it’s success
busting through targets with its (admittedly much smaller) CMQ deal. And the new CBR,
especially the DRU stuff out of Hardisty Alberta down to Texas looks to be a home run (less than
a week away….).
- Speaking of CMQ, that got CP to St John with its natural hedge in favor of Suez business
(assuming they get that Evergreen ship turned around). Getting to the water is always a goal –
adding KSU brings NOLA, Houston, Lazaro Cardenas, and Vera Cruz.
- But one note of synergy caution – I have been repeatedly cautioned not to fall into the “map trap” – look at all of the long single-line hauls we can create! But a line isn’t a line without
looking at: grade, condition, technology, interaction with towns, etc. And the Iowa line goes
through towns like Davenport at 10mph – fine for grain but for intermodal? One real clue is the
business that KSU and BNSF allied to interchange near Corpus Christie (“Robbstown”), a sweet
deal that KSU CEO Pat Ottensmeyer negotiated as part of their own version of re-engagement,
in this case with the western Class Ones they need to provide cross-border volumes. The BNSF
deal brought blue-chip partners (Hunt, Swift, Schneider) – they require premium service. So, for
CPKCS, will they try to capture all of the Midwest-Texas IM business (as CP CMO John Brooks
alluded to in Sunday’s call) or will they recognize that the whole western network is required to
drive growth? Whether they act as accommodators or more hardcore will be fun to watch out
for….
And now, this:
- For a more relaxing railway world, on a 1/87 scale…. Märklin Trains Attract a New Audience in the
Pandemic - The New York Times (nytimes.com)
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18
