Greetings;
In the interest of time and tiredness, I will add some updates, comments, and (still unresolved) questions in red. The call will be repeated at 5 pm I believe; the slides were excellent. The call was helpful, despite the 2nd question being about the OR (ugh – but answered well – “this is about growth” and ROIC).
- The two management teams were very confident about approval; stressed that this was “enhancing competition” and about “job creation.”
- Keith is signed on for the next 5 years; unclear about the integration of the rest of the (good) management teams, or who the Chairman of the Board will be (assuming the company, HQed in Calgary, will use Commonwealth rules on splitting CEO and Chairman roles).
- Welcome back ex-KSU CEO Dave Staring, who will be the “independent Trustee to hold the KCS stock” during the (traditional) voting trust period.
- $200mm inefficiencies over 3 years.
- +$800mm in gross revenues over 3 years – assuming mid-2022 approval, split evenly; diversified across commodities, and seemingly split between new business, truck business, and rail business; $600mm in “EBITDA Growth.”
- Will require enhanced Capex, though “capital synergies” will limit that to about $50mm/year or so – sidings and – and this could be very, very important - CTC.
- On my thoughts:
- KSU or the combination will be accommodating to the affected railways – notably UNP, which KCS needs to keep sweet
- I had thought no further mergers – this was a surprise (certainly in the weekend nighttime timing! – but if it does add stability, then it reinforces my position on no final consolidation round triggered
- Nice breakdowns on the combination’s geographic and business mix; I believe the trade mix is also enhanced
- In the past year or so, CP has added a lot of water access – St John, now Lazaro, Veracruz, Houston, and NOLA
So, the CP-KSU combination was confirmed to me by CP at 618am Eastern – man, does that guy ever need sleep? But what do I care – with OSU out of the NCAAs and KSU out of the Class One Tournaments, I have only time….
The deal is “expected to close in mid-2022”; synergies of ~$800mm are expected (and I expect will be discussed on the call at 2 pm).
So, here are my original thoughts at midnight my expanded tweet:
Boy, I sure didn’t see this coming (mea culpa – see comments after rejected $20B infrastructure group bid)); and during “March Madness”! The FT reports that CP has agreed to buy KSU for $25B and has notified the US regulatory body, the STB. My guess is that despite what I have thought was a more “interventionist” stance, STB approval is likely as there is little to no overlap – and this is the only merger that – by itself, as a standalone - might not trigger full rail consolidation, as any other pairing likely would. That would be more problematic….This, if (real, - AND IT IS - and) allowed, would give CP, like CNI, three-coast access. I admit I actually checked the calendar to make sure that it wasn’t midnight, April 1st. It is not….And, I thought the hoops were exciting!
Some thoughts before the 2 pm conference call:
- This can be viewed as a stabilizing merger.
- It removes KSU, long thought to be the Sarajevo 1914 (or Fort Sumter 1861) from being “in play.”
- It combines the two smallest Class One railroads, thereby eliminating some internal angst (note – the combination will STILL be the smallest C1).
- The remainder, when all is said and done, is 2 western, 2 eastern, and two triangular “NAFTA” railroads – symmetry (?).
- Both already through PSR 1.0, CP having for a while now “pivoted to growth” whilst KSU’s mantra is “service begets growth (note there are at least three well-known CN/PSR vets at KSU).
- It – and the new contract he signed – removes CEO Keith Creel from every investor fantasy league (“where will he go next/ what is his next challenge?”).
- I don’t see any realistic chance of STB rejection – few to no 2:1 shipper points; synergy opportunities in grain, CBR/refined products, autos, IM; a hedge on near-shoring (as the CMQ was a hedge on Vancouver and China?).
- KSU had assembled a fine railway team – what’s to happen? This is the major reason why I had to mea and culpa….
- That said, as a key player said, “there will be a line around the block” of stakeholders seeking handouts/deals, including:
- UNP, the most impacted (?), along with their 26% stake in Ferromex.
- BNSF, impacted railway #2 (?).
- NSC, (basically OK with this) which retains some rights via the Meridian Speedway (see their masterful performance in the PAR deal).
- CSX – (ditto) someone suggested they might buy the Gateway Western for a “few hundred million” and get access to KC.
- CNI – impacted differently than most suppose – CP gets bigger (at a cost), there is Alberta-to-Texas(-to Mexico) business, some autos…..
- Short lines likely favor this
- Interesting that both CP and KSU come from the legacy of rugged individualist CEOs.
- Mike Haverty had expressed interest in looking north (recall the DME) for among other things Ag origins to send south.
- But Mike didn’t want to sell!
- Hunter was never interested in Mexico (another sign that, although he was a protégé, KC is not EHH).
- Regarding the port of Houston, I was told: The previous restrictions on what traffic can be carried on the trackage rights gained by KCS in the UP-SP merger will remain in place, i.e., the only traffic that can be carried over those trackage rights is traffic that originates or terminates beyond Corpus Christi, including Laredo and Mexico. In short, no traffic between Houston and points to the north. It is unlikely to have any effect on Houston, except for perhaps for some additional trains passing through Houston.
Map (thanks OW):
