D.Carleton wrote:One more wrinkle: as has been noted in another thread, CP was the target of proposed takeover earlier this year until the loan market hiccupped. DM&E/ICE is a huge fixer-upper with a huge potential, but it's still a fixer-upper nonetheless. Taking on this sort of risk would make CP a less appealing target for a hostile takeover.
That was also pointed out in one of the earlier posts in this topic as well. While I tend to agree that CP is a lot less appealing to Brookfield (or other equity company) now, I think this is one of the added bonuses that come with the deal. I say this because the DM&E/IC&E merger has been in the pipes for a while. A merger like this doesn't just happen. So CP was probably negotiating before the buyout story broke and this helps make that less and less of a possibility.
Now here's my two cents on why CP went ahead with the deal, besides reducing a takeover.
The primary reason is coal and lots of it. CP likes moving coal and is good at it. CP has lots of expirience moving coal in B.C. and the PRB would give them access to lots more coal. Plus the coal in the PRB is easier to move as the area doesn't come with the mountains that B.C. comes with.
Secondly, Ethanol. There is an explosion going on in the midwest and ethanol plants are springing up like crazy. This deal will also give CP access to a lot of these new ethanol plants and the revenue that comes with it. I recently read that estimates for ethanol will top 1 billion gallons a year by the end of 2008. So that's also a fairly large market.
Next, Kansas City. This merger gives CP a connection with Kansas City which is something they haven't had before. There is a trade boom going on with Canada and Mexico (as well as Mexico and the U.S.), and till now UP has been CP's main connection for getting goods to and from Mexico. Now CP can interchange with KCS as well, who will then run directly into Mexico.
Finally CP hasn't really grown for quite some time, while a lot of the other Railroads have. CP's last merger was with the D&H, yet in the last 10-20 yrs the other RR's have really grown. UP/SP, CN/BCR/IC, BN/ATSF and so on. So I think CP has been looking to grow for a while to try to keep up, and with the exception of the BCR deal (which was stupidly given to CN) CP hasn't really found an opportunity to merge with another RR and have that merger fit the CP system.
Anyway, I think this deal has a lot of advantages to CP and while it may be expensive today, it will lead to a lot of opportunity down the road.