Greetings;
The April Fools/Good Friday CP+KSU “big reveal” (“what side are you on, boy?”) revealed little surprise (well one, below)….
From the tweets (sign up!):
- CP/KSU – Sides being taken; ~260 for the CP+KSU deal (inc. many ship lines, and the largest short line holding company, GWR); and large numbers (many Ag groups, the ACC -Chems, and 4/5 of the other Class One Rails – NOT CSX) on the other side, sort of, by coming out against KSU retaining its EXEMPTION, but not – necessarily – against the deal. Listed reasons: the exemption is outdated (the 20 years time elapsed) and KSU has outgrown its exemption (no longer so tiny); in addition, given the rough history of (non-end-to-end) mergers, there was discussion of service assurance. Left unstated was the expected opportunism….” the circle game”….
- CP+KSU continued: Albeit equally predictable, the shipper objections weigh more, though UP’s focus on Laredo is interesting (and solvable – see below - and in KCS interests). Meaning no disrespect, and without full or more info, I expect STB to “kick the can” by removing exemption - which does NOT mean rejecting a voting trust (VT) – or rejecting the final deal….
Some thoughts from the past few days on CP/KSU:
And the seasons they go round and round
And the painted ponies go up and dawn
We're captive on the carousel of time
Joni Mitchell/”Circle Game”
- (It shouldn’t need reminding but) I do not have a horse in this race – I have a long-established position on “Final Consolidation” or anything (which would mean everything) involving the US “Big Four railroads (to sum: bad! To expand – conditions imposed would outweigh benefits created). Most rail leaders seem to agree, although one that doesn’t is Keith Creel, and while I am an observer, I remind you that he is an actor on the stage. And, again, while I think that final round mergers won't happen, being obviated by PSR (efficiency and capacity creation) as well as technology, etc, if I am wrong I will be very, very wrong.
- I continue to believe that this proposed combination, CP+KSU, adds more stability (locking in Creel, adding size to the two smallest railways, and taking the KSU flashpoint out of the mix).
- In fact, the way the Final Round was to play out most often goes like this, in descending order of power:
- UNP+CSX+CP
- BNSF+NSC/CNI (the latter two cower to equals)
- So CP+KSU actually works against this vision since UP cannot swallow KSU without raising huge issues with the STB and with Mexico!
- As such, and the (major) fact that this is truly an end-to-end merger., that this will be approved, eventually. If it is rejected, there will be no more rail mergers. If it approved, there still should be (and likely won't be) any more rail mergers.
- Caveat – I am not a lawyer.
- With the greatest of respect, I believe, without any hard evidence, that the STB will “kick the can” at first – that is, denying the exemption isn’t a hard decision for them, allows for more study, and also allows for both a Voting Trust and eventual approval, which I believe will (and should) happen.
- There may be some conditions, of course, either negotiated or imposed. The UP’s arguments on the Laredo gateway make sense; I would argue that it is in the KCS (and also the CP+KSU) to provide reassurance (and collect volumes).
- CP already answered some of these questions, telling the JoC that they “would not eliminate any interchanges (with UP or BNSF) at Laredo’ and that they “’anticipate no changes in cooperative interline relationships’” such as the Meridian Speedway (NS). CP says that they will reply and/or rebut by April 12….
- The BNSF arguments were written by former STB Chairman Roger Nober, which could carry some weight, and outranks the pro-deal Op-Ed written by former Commissioner Chip Nottingham; we await commentary from another former Chairman, Dan Elliott….
- There were several mentions that in 2001 CP opposed KSU exemption – funny, but nothing more as CP in 2001 bears almost NO resemblance to CP in 2021.
- The shipper concerns carry more weight with the STB, of course. Most of them, so far, aren’t deal-breakers (I am sure that both annual loads heading from the Gulf to Toronto can be accommodated); this is just the “circle game”….
- The shipper's comments included (from the 9-shipper consortium letter, but similar sentiments from others) “PSR has brought about reduced and impaired service”….to which I say “PERFDAH!” (below). Maybe at first (v1.0) but not later (see CSX) and not in CANADA….
- I loved this lane extension: KCS need not be acquired by another C1 railroad in order for its investors to realize an impressive ROA….” Citing reported PE (actually I would call it Infrastructure Fund) interest….at a 20% discount to the CP offer and without the ability to share in the newco upside….and NONE OF THEIR BUSINESS!
- Perfbah! And that’s their pronunciation guide at work….One of those shipper groups was the “Private Railcar Food & Beveridge Association”, consisting of ~13 food companies (Kraft-Heinz, McCain, Land O’Lakes are all I could find – try to find out more, I double-dog dare you)
- It’s interesting how (high service) steamship and intermodal shippers/companies are on CP’s support list – they see increased optionality although it remains an open question whether CP/KCS can compete as the third line in the premium lanes, even with CAPEX.
- CSX goes its own way (goes its own waaaay): Before more on the biggest issue of the day. It's worth pondering (another lonely day!) CSX’s breaking ranks with its peer C1s (or is it showing solidarity with fellow ex-CN leadership? But then, CN itself didn’t….). It’s one of three interesting tacks taken by CSX of late, the others being CEO Jim Foote telling the Jacksonville Business Journal that its crystal ball was still very cloudy (“we were less transparent” – in the January earnings webcast – “than many people would have liked”) even if they were optimistic, so much so that when asked what inning they were in regarding retaking market share from trucks, JF said “spring training”!
What goes up must come down
Spinnin' wheel, got to go round
Talkin' 'bout your troubles, it's a cryin' sin
Ride a painted pony, let the spinnin' wheel spin
BST/DCT
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18