(The following report by Scott Deveau appeared on the National Post website on September 7.)
OTTAWA — Canadian Pacific Railway Ltd. (CP/TSX) took a huge gamble yesterday in agreeing to buy Dakota, Minnesota & Eastern, but the only thing huge about the deal, most analysts agreed, was the price tag attached.
“DM&E seems a natural end-to-end acquisition for CP that will enhance CP’s industrial, grain and coal franchises while creating an entry into the fast growing ethanol business,” said Bear Stearns & Co analyst Edward Wolfe in a note to clients. “The only issue we have with the acquisition is the large price that CP paid.”
DM&E had earnings before interest, tax, depreciation, and amortization of US$103-million in 2006.
Nevertheless, Canada’s second largest railway said yesterday it plans to buy the regional Midwest railway for US$1.48-billion, with an additional US$1.05-billion payment contingent on whether it starts hauling coal from the coal-rich region of the Powder River Basin.
Fred Green, CP chief executive, said if the Powder River Basin project goes ahead, the railway hopes to have it completed within the next five years. But estimates have attached another price tag of at least US$4-billion to the development project, on top of the purchase price of DM&E.
“CP Rail would have to capture up to 15% market share in the [Powder River Basin] to make the project breakeven on a cash flow basis,” said UBS analyst Fadi Chamoun in his note to clients. “We view this to be unrealistic.”