(The following story by Peter Harriman appeared on the Argus Leader website on October 13.)
SIOUX FALLS, S.D. — Canadian Pacific Railway officials say they have completed acquisition of the Dakota, Minnesota & Eastern Railroad, setting the stage for a review of the $2.5 billion transaction by the federal Surface Transportation Board.
The STB must sign off on the deal. It could take as long as eight months to make a decision, says DM&E Chief Executive Officer Kevin Schieffer.
Wall Street railroad analyst Anthony Hatch expects the STB will find no major problems with the merger, since it will give South Dakota shippers access to a second Class I railroad in Canadian Pacific. Now, the Burlington Northern Santa Fe is the only Class I railroad serving the state.
“I can’t really see what could trip this up. This is a deal that will be passed eventually. It’s just a question of when,” he says.
The merger was announced Sept. 4. Terms include a $1.5 billion payout up front, with as much as an additional $1 billion over time based on rail traffic. DM&E stock has gone into trust until the STB approves the acquisition. Richard Hamlin, a private consultant who built a 30-year career as a transportation executive, has been appointed trustee. When the STB approves the deal, control of the DM&E stock goes to Canadian Pacific.
The DM&E and CP will operate independently in the interim.
Ultimately, the DM&E will maintain its identity and probably its Sioux Falls headquarters, and it will operate as a CP subsidiary, according to Schieffer. He also says he intends to stay with the railroad.
Hatch says it is unclear at this point whether the CP plans to follow through with the decade-long goal of its newest asset to extend its rail line to Wyoming’s Powder River Basin and haul coal to Midwest and Eastern power plants. But he says if the CP decides to do so, it might have recourse to federal financing that was denied the DM&E.
The DM&E in large measure sought a merger after it was turned down early this year for a $2.4 billion federal loan to help build the estimated $6 billion Powder River Basin project. The Federal Railroad Administration, which oversees the loan program, cited the DM&E’s existing debt burden as the reason the railroad’s loan application was rejected.
“I don’t think they would. But they do have the potential to go back and seek that loan,” Hatch says of Canadian Pacific. “They could repay it.”
The project and the DM&E’s plans to haul coal on its existing right-of-way through Rochester, Minn., near the Mayo Clinic put the railroad at odds with that community for years. Dennis Hanson, president of the Rochester City Council, says the Rochester Coalition of the city, Olmstead County and the Mayo Clinic still is hopeful about talking with CP officials about a potential bypass, grade separation, diversion of coal traffic or other means of ensuring Rochester is not overwhelmed by coal train traffic.
“I think we would like to open communication as soon as we can for the simple fact we would like to get started on the right foot,” Hanson says.
“We stubbed our toe the last time” in attempting to negotiate with Schieffer. “We would like to come out of the gate prepared to sit and talk, versus pointing fingers,” Hanson says.
The Rochester Coalition was a formidable and dedicated DM&E opponent. Similar opposition would sway the CP “not one iota,” Hatch surmises. The CP will base its decision whether to build the project solely on whether it makes good business sense, he says.
Regardless, the CP gained a valuable property in the DM&E, according to Hatch.
“The most important thing was how good of a railroad the DM&E had become. Now more than ever with the corn business and the ethanol business, the DM&E has become quite a good railroad.”
The DM&E has grown from a regional railroad operating on some of the oldest, most decrepit track in the country into the largest Class II railroad in the U.S. It was founded on rail line across Minnesota and South Dakota that the Chicago & North Western planned to abandon. In 1987, its first full year of operation, the DM&E had total revenues of about $22 million. That is expected to reach $290 million this year and $340 million in 2008, according to DM&E officials.