(The Canadian Press distributed the following article by Allan Swift on November 25.)
MONTREAL — The $1 billion cash purchase of B.C. Rail by Canadian National Railway Co. continues the Montreal company’s rapid North American expansion and is the second deal in recent weeks in which Canada’s biggest rail operator is boosting its presence in the resources sector.
Canadian National said Tuesday’s strategic deal will expand its western operations, strengthen CN’s forest products business and help the company lure shipping traffic away from the trucking sector through lower rates and faster shipping times.
Chief executive Hunter Harrison said he expects B.C. Rail will add to CN’s profits in the first year of operation.
“CN has a record of flawlessly bringing other railroads into its system,” said Harrison. “We expect nothing less in the integration of BC Rail into CN’s network.”
A Toronto analyst, who asked not to be named, said he believes Harrison when he says the B.C. Rail acquisition will add to earnings the first year, given CN’s recent history in rail integrations.
“CN is already one of the largest transport companies in the pulp and paper business and this would fit well within their business,” said the analyst.
CN Rail, which has been trying for years to grow its business in the West, won its bid against competition from Calgary-based CP Rail, Canada’s No. 2 rail operator, and a U.S. group led by Burlington Northern Sante Fe Corp. and OmniTrax, a short-line operator.
Tuesday’s deal is the second acquisition in recent weeks for CN as the railway continues to bulk up in a consolidating North American rail industry. Last month, the company announced it was paying $500 million for eight Great Lakes vessels and two regional U.S. railroads that ship iron ore between mines in Minnesota and U.S. Steel Corp. mills near Pittsburgh.
On Wall Street, the Bear Stearns brokerage said the takeover is a good move for CN, which will benefit from expected efficiencies in consolidating its B.C. operations with those of B.C. Rail. CN has about 1,400 workers in British Columbia, while B.C. Rail employs 1,380.
CN Rail plans to cut about a third of B.C. Rail’s workforce – some 430 jobs – mostly through retirements and attrition.
Claude Mongeau, chief financial officer, said CN will save $100 million to $125 million in taxes every year for several years starting in 2005, as a result of accumulated losses at B.C. Rail.
Mongeau said B.C. Rail should add 25 cents a share to earnings by the second year.
Harrison noted that forest products is CN’s largest single business, accounting for 22 per cent of revenues, or $1.3 billion a year. Shipping lumber and other wood products account for 70 per cent of B.C. Rail’s revenue.
“So it’s an excellent fit for us; there are clearly some obvious synergies.”
Harrison said enthusiastically that the investment proposed by CN to the rail line to Prince Rupert, plus $17 million promised by the province, could make the remote port into a major gateway for containers from Asia.
He said Prince Rupert is 1.5 days closer to Asia than any other North American Pacific port.
He added there is an opportunity to ship Minnesota iron ore to China through the same gateway.
Among other plans for B.C. Rail, CN promises to:
– Assemble forest products trains in Prince George, the heart of the B.C. lumber industry, for scheduled express trips to the continential rail hub in Chicago;
-Invest $1 million in a new wheel shop at its Prince George shop for CN work currently contracted out as well as assign additional CN car and locomotive work;
-Invest up to $15 million in infrastructure to accommodate double-stack container trains on its BC North line;
– Support introduction of passenger train tours by third party operators, including rail alternatives for the 2010 Winter Olympics (news – web sites) at Whistler.
– Acquire 600 new centrebeam cars and upgrade 1,500 boxcars to accommodate anticipated truck share gains for forest products.
He said the so-called Prince George Chicago Express will make the trip in 90 yours, about half the time the trip was before CN began providing scheduled rail service in 1998. “So clearly we have a large edge on the competition; “We’re comfortable we can have significant growth in B.C.”
In Calgary, a spokesman for CP Rail said Canada’s second largest railway is disappointed it lost the bidding process, but it will remain a “fierce competitor” to CN in British Columbia.
“We believe we put forward a really strong bid that fully addressed the criteria established in the bid process,” Paul Clark said in an interview. “And we believe it would have enhanced rail competition in the northern (British Columbia) Interior.”
“But, that said, we’re certainly going to be a fierce competitor and we’re committed to providing competitive transportation alternatives to the shippers in British Columbia.”
CN stock (TSX:CNR – news) fell 28 cents to close at $76.95 on Toronto stock markets Tuesday.
Montreal-based CN is Canada’s biggest railway, with operations across the country and into the United States to the Gulf of Mexico. The former Crown corporation, privatized in the mid-1990s, had 22,668 employees at the end of 2001.