Greetings;
Play Ball!
This is just a quick note before tomorrow, what ordinarily would be a holiday, at least in this household,
coincident with April Fools Day – the last day of commentary on the proposed CP/KSU merger….note I
said before – this is not a joke, there is a merger proposal and other hot news! Watco won the CN-WC
line segment deal, as expected; the President unveiled the $2T+ infrastructure ($620B to transport
infrastructure – but note - $174B for EV) bill funded – in part – by the expected increase in the corporate
tax rate to 28%, and funny stuff on ESG and UNP….And the Suez Canal issue was floated and resolved
(only to see a similar problem crop up elsewhere – see attached); more on that in the next update, after
the Dodgers game.
From the Tweets:
April 1 is a Big Day for 3 reasons: It’s April Fools, Opening (!) and “RR Objection” Day – the last day
interested parties can file on the proposed CP+KSU merger (NOTE – some have interpreted the dates to
suggest RR-OD might be Friday, April 2nd; a holiday for the Street but not for most others). As it is
“end2end”, I see no reasonable basis for a hard opposition, but negotiations & leverage will come into
play (and, despite the holiday, I will be standing by). Note: The NITL filed opposing not the deal (yet?)
but the exemption, and….As I stated in my slides (attached once again FYI) and in my last note, On the
CP+KSU proposal, I believe that it will pass, following a Voting Trust, which should be in place in late
summer (?), whether or not KSU is declared “exempt”. In terms of the VT, the key, if KSU is ruled nonexempt, is the more stringent “public interest” requirement – which I believe, not being a lawyer, is
clearly supported. For reviewing the merger, a key question in terms of competitive “harm” – does the
STB represent potentially harmed shippers or anyone? (I.e.; the STB brought BNSF into Texas markets
not to help the BNSF per se, but to address the grievances of petrochemical shippers, etc, who felt they
were losing – 2:1 - rail access). What I learned from the panel (below) is that railroads can file a
“responsive application” but that doesn’t answer my philosophical question (and recent STB behavior
does not suggest a “pro-rail” bias! In fact, in the PSR process, only KSU has been singled out for praise).
See those earlier reports and podcast links….
Other thoughts on the CP+KSU:
- The two rails issue a press release touting their support: Canadian Pacific - Canadian Pacific,
Kansas City Southern Receive Widespread Support for Creating First U.S.-Mexico-Canada Rail
Network (cpr.ca) - I moderated an interesting panel that consisted of a former senior executive in operations at CP
(and CN), a former intermodal operations exec at KSU, and a former Chairman of the STB.
Highlights include:- General and consistent support for the deal, from a regulatory and operational
perspective - Noting some interesting issues – CP’s NOLA access (as a worry to CN) and KCS’s access to
Chicago as a prize (looking at this not just from CP’s perspective, in other words) - But there was an interesting debate as to whether the CP/KCS line would still be “the third-best line” N/S from the Midwest to Texas (Former CP exec – that can be fixed;
Intermodalist: still #3; UP clearly has the best route – well-maintained and ~200mm shorter) - There are some intermodal philosophy issues – KCS, unlike CP, is a non-asset player
- KCS has paused its developing new operating system (unconfirmed), making the combination actually easier to process (or “pro-cess”); the parallel running of the systems allows for live trial/error for the newco system….
- Once we get the full application (~June 28?), CP’s proposed 10-month review seems
aggressive, but just….perhaps 16 months?
- General and consistent support for the deal, from a regulatory and operational
- The question on the Voting Trust is whether it is informally applied for and granted (old
and “exempt” rules) or through a more formal process former STB Commissioner Chip Nottingham wrote an editorial in RA supporting the merger and the Voting Trust (“routinely used” in rail mergers) (and noting that his opposition to the Voting Trust in 2016 involving CP and the US east was for reasons that I have been saying (concerns that the VT/target wouldn’t have been “truly independent” – not valid here, in part because of the
role to play by Dave Starling). - Speaking of the magazine RA, they had their annual press-release parade of Class One CEOs
“Outlook”, usually best saved for your birdcage – but the titles and topics chose (or pre0arranged) by the CEOs is telling: CP’s Keith Creel chose “Growing the Top Line” while KSU CEO Pat Ottensmeyer chose “Maximizing the USMCA for Cross-Border Growth”. Hmmm. It’s not that the others weren’t interesting (CSX’ Jim Foote: “Railroads as a Sustainable Business”, etc), it’s that CP/KSU seem to fit their (revealed after the writing) merger strategy…. - Every law firm worthy of its ambulance-chasing medals is “investigating” this deal….
On the Infrastructure Plan, I wasn’t surprised by the tax increase, by now – were you? It is also, as the
US Chamber of Commerce stated, the beginning of the negotiation process. I was concerned about
some things “sneaking in there” that might be illogical or damaging to rail, or both, so I asked one of my
friends who is a DC & rail expert (and regular RailTrends Speaker) about, specifically, “Truck Size &
Weight” (TSW) increases (note – the rail long-held and logical rail position is that increasing TSW is fine
as long as they pay their share), and mandating two-man crews (as was proposed last year by the
Democratic congress. He stated: “Those types of policies wouldn’t really be appropriate or viable for
this type of infrastructure package, so no they weren’t included, which is good but expected. Those
would be in play in a more traditional surface transportation reauthorization bill, which still needs to
happen at some point, but that’s not what today’s package was about. I feel pretty good about holding
off TSW increases nationally, although there are huge threats in various individual states”. So far so
good – but he went on: “Crew size is more of a jump ball in my opinion. There’s no legitimate
justification or data to back it up, and it’s insane when the government is looking to help our competition
go to zero crew, but the politics are a huge challenge.” For the sake of exploiting current and coming rail
technology advances, those challenges must be met….
On ESG - Barrons notes that Bill Gates will have a representative on CN’s board; look at his new book
(“How to Avoid a Climate Disaster”) see where he stands on the “E” part. CN and CP have also signed on
to TCI’s “Say on Climate” requiring annual reports on climate change progress. Interestingly, UNP, a
loud and proud ESG proponent, has resisted doing so. TCI is the largest CP shareholder, is a ~top 5
shareholder in CNI, and owns ~1mm+ shares (~1%) of UNP. The latter’s stance is that they are already a
leader in this regard (I think that’s true) and that being required to produce an annual plan is onerous
and places too much focus on shorter-term, YOY change, which has some merits. But the optics don’t
look good, especially when two peers have approved it (albeit with a larger % ownership presence) and
the new administration is wrapping itself 9and infrastructure) in the green flag. As of my writing, this
hasn’t been finalized; interestingly, one (passive fund) major holder, State Street, who along with
BlackRock and Vanguard, have been leaders in pushing a more climate-woke agenda, have come out
supporting UNP.
On the Watco deal, they won (bought from CN) the former WC lines in the US (~650 miles) and part of
the Ontario Soo subdivision (another 250 miles); they will also “continue the Agawa Canyon Train Tour”
(now….that makes me nervous). Details weren’t disclosed (perhaps $200mm plus, real dollars?) and the
only real surprise is what took this so long, announced in July of last year, with Watco, always on the
“preferred buyers” list, having connections and potential synergies due to its Wisconsin Southern lines.
The STB, rapidly getting a full plate, will rue on this deal as well, though no objections are likely. Also
from Watco, their CCO/Strategist gave a “Sandhouse Gang”/Northwestern University lecture last week
on the new model of short-lining, noting the Dow (behind the fence, or “industrial in-plant” switching)
and Giesmer (partnering with a Class One, in this case CN) deals as paradigm-changers (sorry) in terms
of compensation for work and “staggering” volume potential. In his portion of the RA “CEO
Perspectives” piece, Watco CEO Dan Smith “Integrated Transportation Fuels Growth”, dovetailing nicely
with Stefan’s lecture. On the subject of paper barriers (see the STB conditions imposed on the CSX sale
of the Massena Line to CN, etc), Stefan opined, as many of the large SLHCs do, that such fights (by
shortlines) with (C-1) partners were “useless”….
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18