(The Toronto Star posted the following story by Rob Ferguson on its website on October 21.)
TORONTO — Canadian National Railway Co. is making a splash in the lake freighter business as part of a $500 million deal to buy Great Lakes Transportation LLC, a Pittsburgh-area firm that ships iron ore pellets by rail and water from northern Minnesota to eastern U.S. steel mills.
The purchase, in the works since Great Lakes went on the auction block earlier this year, will also improve CN’s rail links between its growing Chicago operations and western Canada, the continent’s fifth-largest railway said yesterday.
“It’s really geared to the U.S. steel industry,” CN spokesperson Mark Hallman said.
While American steel manufacturers have run into trouble in the past two decades, the outlook has improved and “we are confident the U.S. steel industry will emerge on a solid footing,” Hallman added.
About 70 per cent of Great Lakes’ revenues of $284 million last year came from shipping iron ore pellets to industry giant U.S. Steel, said David Novak, a vice-president at the Monroeville, Pa.-based company. Great Lakes, which has been privately owned by New York investment firm Blackstone Group since 1988, does not release its profit figures.
Great Lakes’ revenues are a small percentage compared with the $6.1 billion taken in last year by CN. The railway, whose shares dipped 18 cents to $72.25 on the Toronto Stock Exchange yesterday, will borrow money to pay for the deal, adding to its debt of $4.5 billion.
Hallman said the transaction will add “modestly” to CN’s earnings per share in the first full year of ownership, largely because of cost savings the railway hopes to implement.
He wouldn’t detail how much CN expects to save, but said efficiencies should come from routing more trains on Great Lakes track, avoiding capital costs of upgrading CN’s existing lines, as well as eliminating duplication in some operations.
“There will be an impact on rail employment,” Hallman said, adding CN would try to find jobs in its other operations for any laid-off Great Lake employees.
One of the unions representing Great Lakes workers is bracing for cuts, which CN is expected to detail in a couple of weeks as it seeks regulatory approval for the deal.
“There’s always concerns of the unknown until you find out what’s going to happen to traffic and jobs,” said Dick DeLano, chairman of Local 163 of the Brotherhood of Locomotive Engineers in Duluth, Minn.
Under the deal, expected to close next year after government approvals, CN gets four companies with 1,000 employees, 611 kilometres of track, 63 locomotives, almost 5,700 freight cars and eight self-unloading lake freighters.
The companies are:
The Duluth, Missabe and Iron Range Railway Co. in northeastern Minnesota, where the iron ore is mined and processed into pellets for shipment by rail or water.
The Bessemer and Lake Erie Railroad Co. carrying iron ore, coal and limestone from the Lake Erie port of Conneaut, Ohio, to steel makers in Pittsburgh.
The Pittsburgh and Conneaut Dock Co., which transfers cargo between ships and trains.
Great Lakes Fleet Inc., which owns seven self-unloading lake freighters and charters another. The fleet is based in the Lake Superior port of Duluth, Minn., and provides a cheaper way of transporting iron ore than trains, Novak said.
Key to CN’s strategy in the deal is that the Duluth railway owns a 27-kilometre link in CN’s main line.
“They’ve been paying a lot of money to go on our track and now they’re going to own it,” said DeLano, who works for the Duluth railway, which laid off 86 employees in May when an iron-ore-pellet manufacturer went belly up.
In addition, the deal secures for CN a 100-kilometre stretch of parallel main line so it can dedicate each set of tracks to trains heading in opposite directions, reducing traffic problems.
“Currently we have trains dodging into sidings and then backing back out,” Hallman said.