SIOUX FALLS, S.D. — According to the Argus Leader, the Dakota Minnesota & Eastern Railroad will more than double its size and significantly expand its reach with the purchase of the I&M Rail Link, company CEO Kevin Schieffer announced Thursday.
The purchase, which observers estimate totals $150 million, will connect the Brookings-based DM&E with the key markets of Chicago, Minneapolis and Kansas City, as well as Mississippi River ports and Iowa grain processors.
“For anybody looking at a map, it jumps out at you, the strategic implications,” Schieffer said during a news conference announcing the purchase. “Now we are an origin-to-destination railroad.”
Federal regulators must approve the deal, which comes as the DM&E is trying to reach 262 miles west with new rail to the coal fields of Wyoming’s Powder River Basin.
I&M was created in 1997 from a portion of the Canadian Pacific Railway. The I&M operates on 1,700 miles in Minnesota, Iowa, Missouri, Illinois and Wisconsin. It ties into DM&E’s 1,134-mile line across Minnesota and South Dakota at Owatonna, Minn.
Where the DM&E had limited interchanges with the larger railroads – gateways to the rest of the nation – the I&M has 30 such links.
Schieffer declined to announce the cost of the acquisition, but the Wall Street Journal is reporting it was $150 million. DM&E purchased I&M assets from the Washington Organization, which also operates the Montana Rail Link and the Southern Railway of British Columbia.
Farm groups hailed the merger.
“With their ambitious expansion and rebuilding project, and now this acquisition, DM&E is taking bold moves that will have a lasting and profoundly positive impact on agriculture throughout South Dakota and Minnesota,” said South Dakota Farmers Union President Dennis Wiese.
“This is another incredible leap for this ‘little railroad that could,’ and we appreciate DM&E’s aggressive leadership to provide a first-class transportation infrastructure for our region,” said South Dakota Farm Bureau President Richard Kjerstad.
Schieffer took pains to point out that the I&M purchase is separate from DM&E’s $1.5 billion reconstruction and expansion to Wyoming to haul coal to Midwest power plants.
“None of this relies on a single ounce of coal traffic,” he said.
But he did note there are already four coal-fired power plants on the I&M line, and perhaps as many as a dozen can be reached from the Mississippi River.
As DM&E looks for financing for its Powder River Basin project, “this becomes a compelling transportation system,” he said of the new railroad.
Frank Wilner, public relations director for the United Transportation Union and former chief of staff for the federal Surface Transportation Board that regulates U.S. railroads, said all of Schieffer’s plans are contingent upon finding equity partners to build the Powder River Basin project.
“All the plans and all the acquisitions are secondary until we learn whether this railroad will even be constructed,” said Wilner, the author of several books on railroad economics.
Attractive to investors
Luther Miller, executive editor of Railway Age magazine said he thinks the I&M purchase makes DM&E more attractive to at least one reputed potential investor.
“It was a very smart move on Kevin Schieffer’s part. If the cost was only $150 million, as the Wall Street Journal is speculating, it seems to be a very good buy,” Miller said. “The people I have been talking to this morning suggest it (the merged railroad) would now be attractive to the Canadian Pacific. We are all watching this very closely.”
Wilner, however, said the DM&E is controlled by financial speculators in San Francisco.
“There has been discussion some major utilities might fund the extension,” he said. “But that seems to have less credibility, given the state of the electrical utility industry today. There is no other indication where the funding might come from.”
The combined railroad’s role is as a third coal hauler out of the Powder River Basin, he said.
“The challenge for the DM&E in getting financing is to demonstrate to potential investors that it can sign up customers under long-term contracts for Powder River Basin coal,” he said.
DM&E has annual revenue of $60 million, about half of the I&M’s, according to Schieffer, who characterizes DM&E stockholders as railroad pension funds and institutional investors.
Both railroads operate at a profit, he said. But the DM&E’s aging, decrepit track requires capital improvement, and the railroad’s traffic cannot generate enough money for the construction. That is driving the expansion to Wyoming to haul coal.
The I&M line is in much better shape, Schieffer said. However, it is hard-pressed by competitors in the states where it operates, both Schieffer and Wilner said.
“The I&MRL today faces some real struggles,” Schieffer acknowledged. “There are a lot of structural issues, and it hasn’t worked very well fundamentally from a financial standpoint.”
The DM&E will seek approval from federal regulators for the purchase, and Schieffer hopes to have that accomplished by the middle of this year.
“From the regulatory side, this is a hands-down winner. It is pro-competition, and the little guy is getting a little bigger for a change instead of the big guy swallowing up the little,” Schieffer said.
‘De facto’ merger moratorium
The Surface Transportation Board has looked askance at railroad mergers since it blocked a proposed merger of the Burlington Northern Santa Fe and Canadian National.
“There has been a de facto moratorium on big mergers for two or three years,” said Miller, the Railway Age editor.
But since DM&E’s purchase is a deal struck between two regional carriers, it is not likely to be affected by any merger ban, he said.
The DM&E’s Wyoming project received federal approval in January only after a two-year environmental review that has already brought three legal challenges from opponents along the line.
With the acquisition of the I&M assets, the two railroads will operate separately as the DM&E and the Iowa Chicago & Eastern Railroad Corp. They will be commonly managed through a holding company, Cedar American Rail Holdings Inc. Schieffer will be CEO of all the entities.
“The successful coordination of two companies is always a challenge,” he said. “We are approaching this challenge with an open mind, with the expectation we will learn a great deal by listening to the best from both companies.”
Wilner points out “the I&MRL has very qualified operating officers who learned their craft on some of the major railroads.”
The DM&E is headquartered in Brookings and the I&M in Davenport, Iowa. Whether there will be a new headquarters for the two has not been determined.
“There has been no decision at this time to move the headquarters. That will be decided in the near future,” Schieffer said.
As an aide to Republican U.S. Sen. Larry Pressler of South Dakota, Schieffer helped with the creation of the DM&E between 1983 and 1986. It rose like a phoenix from an abandoned portion of the former Chicago & North Western Railroad. After overseeing its birth, Schieffer became head of the DM&E.
“Kevin was brought on board specifically because of his Washington contacts from his former life as a key aide to Senator Larry Pressler,” Wilner said. “Kevin has performed wonderfully in his task of achieving regulatory approval for the Powder River Basin extension. Whether the investors who eventually come forward believe Kevin has the skills to operate a major coal-hauling railroad remains a question for those investors.”
Almost from the moment the DM&E came into being, Schieffer said, he has been acutely aware how severely the railroad was hemmed in at its eastern end. That dramatically limited available markets for shippers.
When BNSF and CN announced their planned merger, Schieffer saw that his railroad would be overshadowed by a huge competitor with virtually unlimited access to the East.
“Even though that merger did not happen, we saw how vulnerable we were in the east. We set out with a vengeance to solve our problems at the east end of our system,” he said. “What had been a goal sort of became an obsession for us.”
Attempts to negotiate trackage rights and marketing deals with competitors failed, Schieffer said. About 17 months ago, the DM&E began talking with the I&M about a purchase. The discussion heated up a year ago.
Schieffer characterized the lengthy negotiation as difficult but well worth it. He looked over a huge map Wednesday that depicts the new rail system.
“From a strategic standpoint,” he said, “this makes us a significant national player.”