Greetings;
So CN and CP both spoke at the BofA conference, and it is clear they see the same world from very different perspectives! The most obvious example is Chicago – a problem for CN as seen by CP (and the mayor of Barrington, IL), an advantage for CN-KCS as seen by CN itself (see slide 10 for their presentation: CN-BofA-Conference-Presentation-May-19-2021.pdf ). So many of the lead actors in this play come from the same mothership (Hunter’s CN), it is amazing how different their world views are, and how personal this has, sadly (if entertainingly) become. As War sang, “Why Can’t We Be Friends?”
But first, as has become custom, from the Tweets – and the return of my old custom, travel schedule which I put out in hope of meeting you, dear reader, at these rail events or if otherwise, you might have reasons to inquire... ABH on the Road (again) – Join me @ the two ASLRRA (short line) Regional Meetings next month, June 7-9 in KC & June 21-23 in L’ville. Short lines have NEVER been more vital & valuable, to investors, shippers & Class 1 RRs in this collective PSR environment. C U there!
KSU’s board met (is meeting) today, and CN plans to re-issue their Voting Trust (VT) application tomorrow so there are (plenty) more shoes to drop, but first, each contestant’s CEO spoke at an analyst zoom conference, CN yesterday and CP today.
- Canadian National presented its case as business-as-usual, (even discussing positive Q2 trends) a
far cry from “playing with fire” as (the WSJ’s) Heard on the Street put it. Yes, TCI, a major holder
of both Canadian railways, expressed their doubts eloquently, in an unusual action but as CEO JJ
Ruest put it, equably unusually two major holders (Cascadia, CDPDQ) both expressed support.
The key takeaways:- CN focused attention on their voluntary submission to “new rules” examination – while
this has put them under (literally) unprecedented review – and impacted the VT review,
it is also being used as a competitive advantage vis a vis shippers (1000+ letters of
support, all I am sure voluntary). One investor asked me – “won't shippers prefer the CN
proposal since it's under ‘enhanced competition’ rules?” and...I must admit, I hadn’t
thought of it, being so focused on shippers a) wanting no merger in general b) certainly
wanting no Big Four merger, and c) wanting to take advantage of any STB action to
demand “more”. But, it is....an interesting thought. - Pushes the “Chicago Advantage” of the J (the EJ&E belt railway around Chicago); here I
am biased because I think the Barrington case against the CN/J in 2009 was the worst
case of NIMBY-sim and perhaps even legal extortion I had seen to date (if you build near
a railroad you might....see trains). CN does have better connections through Chicago
and to the east than the CP proposal... - Emphasized their desire to spend capital (in IL, MO, MI, LA, TX – whereas CP has
emphasized its bulk business in SD, ND, Iowa, and MN) - And, relatedly, emphasizes that leverage isn’t a problem – it’s temporary, and they
anticipate maintaining an Investment Grade rating through the process
- CN focused attention on their voluntary submission to “new rules” examination – while
- Canadian Pacific presented its case as anything but business-as-usual...First, they issued a well-
written letter, CEO-to-CEO, urging KSU to respectfully reconsider their support of the CP offer, using their Political Strategy which, essentially, seeks to show that the “real” value of the CN proposal is well short of $325 (time & risk) and that VT approval is no certainty for their competitor. Then on the call, the CEO confirmed what anyone who has been listening knew all along – CP would not raise its bid (“engage in a destructive bidding war”), nor, despite “high-level discussions”, would they partner (with a PE firm) to add to the bid. While the tone and tenor of Keith Creel’s discussion were measured, the content was pointed:- CN’s proposed leverage levels are “shocking”
- The competitive overlap is hardly “deminimus”- in fact, some $700mm in 2019 revenues are affected
- A new tack – the need to support the US rail system and add to its capacity
- Chicagoland
- The STB is strongly signaling, echoing the DoJ letter(s) and CP’s own concerns (leverage, stability), in its commentary – see below
- The CN proposal is de-stabilizing for the railroad industry– Keith really focused his ending on this – if the CN deal is allowed, what deal can be stopped? While CP has a great intermediate-term outlook (agreed), as the smallest, it would make for an attractive target....left unsaid is that with 3⁄4 of the US Big Four having no public succession plans, and KC himself the Michael Jordan of the Class Ones (I view Hunter as more like Wilt), his very presence brooding Achilles-like in his winter tent in Calgary (or, Chicago) is de-stabilizing...
- Shhhh? Also speaking at the BofA zoom-fest, unbeknownst to many, were two STB members,
including the Chairman. I am not sure if the STB is bound by Reg-FD but....one observer sent me
these notes, which jibe with what I know personally about Chairman Oberman and Patrick
Fuchs, who has addressed RailTrends (a public forum). My comments on the notes are in
italics...
* Reiterated that STB is fiercely independent and said there are no Senators whispering in
their ears. Yes, but...
* VT history – this came about b/c selling shareholders want $ now and the STB has
recognized this (IMHO the STB – and the Senate – could care less about shareholders – in
fact, they think Wall Street controls/ruins railroads see DeFazio’s comments form my last
note). (A VT) Allows shareholders to get paid and puts the risk on Buyer to divest if not
approved
* We’ve issued 2 decisions on the Voting Trust topic --- crafted very carefully and speaks
very well for us. If they do say so themselves! We strived to be as clear as we can in our
decisions like all government bodies, and in a land without precedent...I apologize for
the snark, but I am still annoyed that this wasn’t made public...
* Ultimately what allows a VT is our judgment call, based on our interpretation of laws
and precedent – YES! Although there is, of course, no precedent – again – this is an ART,
not a SCIENCE!
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18