• Pan Am Railways For Sale?

  • Guilford Rail System changed its name to Pan Am Railways in 2006. Discussion relating to the current operations of the Boston & Maine, the Maine Central, and the Springfield Terminal railroads (as well as the Delaware & Hudson while it was under Guilford control until 1988). Official site can be found here: PANAMRAILWAYS.COM.
Guilford Rail System changed its name to Pan Am Railways in 2006. Discussion relating to the current operations of the Boston & Maine, the Maine Central, and the Springfield Terminal railroads (as well as the Delaware & Hudson while it was under Guilford control until 1988). Official site can be found here: PANAMRAILWAYS.COM.

Moderator: MEC407

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  by newpylong
 
Gilbert B Norman wrote: Mon Aug 03, 2020 10:05 am Mr. Newpy, could you decode your colors on the map, i.e. which road owns what?

Also, of great interest is who would need be granted rights to wherever in the case of a sale to any of the three Class I "suitors"?

As example, I would think that if NS acquires the Pan Am properties, no further access need be given to any further parties, as the competition presently in place would not be impaired.

But of course, I defer to you; as it would appear you work for the outfit (which "Union Busting" piece I know not).
Blue is PAS, purple is PAR. The others are irrelevant for this topic I was just focusing on the Ayer split. But Red is past and present PAR. I chose the first map to use that came up in a search.

Yes I would think of one outfit buys everything, then yes, the topic is a moot point re: Ayer.

I stopped working for them more than 10 years ago now. I was a Conductor.
  by Trinnau
 
BandA wrote: Mon Aug 03, 2020 1:58 am I don't understand this interchange thing; CSXT presently has trackage rights to ayer, right? From there they can transfer (i.e. "interchange") to PAR or PAS at will? How would that change in a sale?
The interchange is at Worcester (Barbers) to PAR/ST. CSX's operating rights on the Worcester Main are a separate agreement regarding that the Everett/Chelsea area in Boston. Pan Am handles all the Everett/Chelsea traffic, CSX handles the haul on the Worcester Line. Basically, to consolidate crew resources, the Pan Am crew that used to go to Worcester now goes to Everett/Chelsea instead, and the CSX crew that used to go to Everett/Chelsea is now re-assigned to Worcester/Ayer.

CSX does route lots of Ayer traffic via Q426/427 rather than give the haul PAS at Rotterdam. Basically, anything headed to Ayer east from CSX goes via Worcester, anything headed between Rotterdam and Fitchburg goes via Rotterdam. That won't change if NS buys PAS.

CSX won't buy the Worcester line, there's no business to be had on it and CSX's business practices over the last few years clearly show they're not interested in marginal branches. They don't need to buy it to maintain the status quo, the STB will ensure competition for the bridge traffic from Maine. The state would probably buy it before that happened anyway.
  by gokeefe
 

fromway wrote:They are trying to sell ALL of the US trackage situated in the upper mid-west. The speculations is that they are trying to accumulate cash for a future purchase.
I find their interest in New England intriguing. It has been a *very* long time since the railroad business was more attractive in New England than the heartland. Perhaps not since the "Dust Bowl" days or long before ... Perhaps the 1870s.


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  by CN9634
 
gokeefe wrote: Mon Aug 03, 2020 12:25 pm
CN9634 wrote:Not to derail this topic but curious where you got your figures? I'm showing market cap of NS at $49B and CN $70B (On the NYQ)
Straight Google entry of the stock ticker symbol which gives that days results (probably close to live but not sure).
CN9634 wrote:Relative to coal data, 2018 is far too stale considering we are 2/3 through 2020 and that is a highly volatile commodity.
Agreed. Coal is extremely volatile. Figures on traffic share were for an approximate comparison to exposure of that market. NS is of course far more coal dependent than CN and I doubt that has changed.
CN9634 wrote:Not sure where you got on the kick of stock offer, I think either company have enough financial leverage either cash or financial instruments to make a purchase if they wanted.
Your point speaks strongly to "Why equity?". The buyer can preserve their cash position and not have to take on new debt if they use stock. CN's liquidity pool in particular is so deep that it would easily absorb $1B in new shares with minimal dilution. NS has a stronger P/E which also implies less dilution to EPS. Stock is very close to "free money" that the company can print itself and take a minimal penalty on especially when there are significant new tangible assets acquired through the sale. Mr. Norman points out much the same.

There are also some potentially significant tax implications for the seller if they take equity instead of cash.
CN9634 wrote:In any case I'd say this topic has been speculated to death, but my understanding is we should have an idea relatively soon on who has agreed to purchase the RR>
That's good to hear. The less this uncertainty lingers the better.


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Googling the stock tickers shows similar data to what I have, not sure how NS is bigger than CN from what you've seen maybe you looked at a different figure.

I have an MBA so I understand how 'stock' works. Its not as elegant as you put it, and its certainly not printing free money-- its an equity trade off too that needs to be approved by the Board. Issuing too much stock can really start to hurt your financials and impact the EPS, which is important to investors. Before you offer up more stock you really need to do your homework in be in an affirmative position with all parties (options likewise) so its not something you do lightly as you suggest. In fact a large part of the PSR model has been repurchasing stocks whenever possible, trying to keep the share count low and the price high.

Besides lets think about Mellon, guy is trying to retire so you think he's going to just assuming a ton of stock for what? His retirement? Oh wait. And you think he'd blow up the trading volume in a single day and dilute the value? You know for a stock to be worth something you have to quickly be able to sell it, if you create too much trading activity in a short period you can negatively impact the value of the whole thing. Not sure CN or whoever would be interested in that, assuming that PAR goes for ~$1B then thats almost 1.5% of the company, which from a single investor standpoint is a pretty large chunk. You know who the single largest investor is in CN? Bill Gates, he owns nearly 20% of all shares.

Anyways, I think that is a pretty bunk scenario.. impossible? No. But I highly doubt that (also lets think purchase timeline, cash or financing is the way to go).
  by gokeefe
 
CN9634 wrote:Googling the stock tickers shows similar data to what I have, not sure how NS is bigger than CN from what you've seen maybe you looked at a different figure.
I think my lack of clarity in one previous sentence is the source of confusion. I should have written "Inspite of [CN's] larger market capitalization, NS is the more profitable company."

My post on market cap said this:
Market Capitalization (stock exchange:symbol)
Canadian National: USD $70.24B (NYSE:CNI)
Norfolk Southern: USD $49.40B (NYSE:NSC)
Canadian Pacific: USD $37.81B (NYSE:CP)
CN9634 wrote:I have an MBA so I understand how 'stock' works. Its not as elegant as you put it, and its certainly not printing free money-- its an equity trade off too that needs to be approved by the Board. Issuing too much stock can really start to hurt your financials and impact the EPS, which is important to investors. Before you offer up more stock you really need to do your homework in be in an affirmative position with all parties (options likewise) so its not something you do lightly as you suggest.
Issuing USD $1B in stock certainly is no small thing. On the other hand there are multiple ways it can be done including the use of tranches. I would be curious what your take is on the potential tax advantages of equity vs. cash.
In fact a large part of the PSR model has been repurchasing stocks whenever possible, trying to keep the share count low and the price high.
The so-called PSR "model" also seems to involve some practices in accounting which use non-standard industry metrics in order to be able to support claims of gains on operating ratio. I have little doubt that "PSR" produced cost savings and reduced marginal revenues. On the other hand the operational practices appear to have strained the physical plant to the breaking point. I'm unimpressed with businesses that grind down their human and physical capital. That is simply acceleration of depreciation in an attempt to extract short term profits. There is nothing especially smart, creative or special about that strategy.
CN9634 wrote:Besides lets think about Mellon, guy is trying to retire so you think he's going to just assuming a ton of stock for what? His retirement? Oh wait. And you think he'd blow up the trading volume in a single day and dilute the value? You know for a stock to be worth something you have to quickly be able to sell it, if you create too much trading activity in a short period you can negatively impact the value of the whole thing. Not sure CN or whoever would be interested in that, assuming that PAR goes for ~$1B then thats almost 1.5% of the company, which from a single investor standpoint is a pretty large chunk. You know who the single largest investor is in CN? Bill Gates, he owns nearly 20% of all shares.
Here's an example of how this could be attractive:

1. Class I railroad shares produce dividends. Even at relatively low current yields (less than 2%) and P/E in the mid 20s that's still tens of millions of dollars a year in dividends. It's right around $15M to $20M per year for $1B in shares. That could be very close to current net income to Mr. Mellon from Pan Am. At this point Class I dividends look like a relatively stable form of fixed income that requires far less work than keeping an eye on a company.

2. Tax implications of a cash sale are pretty significant. If you have to book the income in a single year the tax bill would be astronomical. There is significant potential for capital gains taxes on the initial investment given the potential sale price. Mr. Norman your thoughts on taxes and potential corporation or trust structures are most welcome.

3. Equity has both upside and downside risk. However over time it generally outperforms cash. Any estate planning for generational succession could consider equities an attractive vehicle for a low tax burden transfer of wealth.

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  by Cowford
 
I find their interest in New England intriguing.
Just to be clear, there is no evidence that indicates "their interest".
  by CN9634
 
I guess I'll drag us through the mud for one more pass....

Few things in life are certain.... two of those things are 1.) death and 2.) taxes. I have never been a party to a mega-corporate merger, so I can't speak to any finer points to that. But I'm going to assume (yes its an assumption) that any transaction won't be with Mellon directly, but with his company Pan Am Systems (or whatever they call it) that owns B&M, MEC, PTM, ect as a vessel in all the proceedings.

Again, problems with your suggestion are that you can't simply 'issue stock' at a company the size of CN. Board needs to approve and say investors are fine to take a hit on their equity position. You typically see stock offerings for companies that have little or no money, or are start up and growth phases. Or you'll see options as an incentive to an executive. Offering stock for a huge transaction would 1.) take time, 2.) signal to the market you have no cash thus 3.) negatively impact the value of your shares. If it were a viable instrument for larger companies, its something you'd probably see a lot more often, but end of the day a seller wants $$$ quickly 99% of the time.

As for the tax issue, you'll be tax on income you make off selling stocks, income from dividends (the slow trickle of) and you'll be taxed on earnings you take out of a company. The real thing that millionaire and billionaires are good at are tax shields, so Id say either way Mellon is going to have to either take a tax hit or find a way to neutralize the liability -- either way its his problem and when he put the RR up for sale, something I'm certain he's aware of.

At 78 I'm thinking he wants $$$ not to fiddle around with his 'stock portfolio'.
  by newpylong
 
If a Class I purchases part or all of PAR, I would suspect the sale amount to not much exceed $500M (if at all) and also find it highly doubtful a stock offering will be involved. If not a portion of free cash, another type of financial vehicle will be used. Not a big enough fish and issuing stock is a long process.

Let's be honest. Most of the valuable property in urban centers has already been capitalized on. There is some left, but it's second tier. None of the facilities are modern. The newest locomotives that they own were built 30 years. Unless there is a tonnage outlook far beyond what's currently there, it's just not worth anywhere near $1B. Not even close.
  by Gilbert B Norman
 
Let's see; very simplified.

NS's 2019 Annual Report notes there are 20M shares of Treasury Stock. At $190/sh, that means NS could "reach into Topper's oat bin" and pull out enough "oats" for a $550M stock purchase of Pan Am. Those shares are not cancelled, as are "buybacks", so no EPS measurement would be diluted.

In Sept TRAINS, Bill Stephens notes that Pan Am has been consistently profitable, but judging from the reports of those around here who have worked for the outfit, there have been all too much of an "unreported liquidation" (DPM's term for deferred maintenance) that will have to be made up if the property is to remain a going concern.
  by S1f3432
 
I agree with newpylong that a $1B purchase price seems like a substantial stretch. If I recall
correctly Mellon paid $20M for MEC and $24 for B&M and rumors have long held that he quickly
recovered the price of his purchases thru the sale of real estate. What would $42M in 1981 be
worth in 2020 and then consider the investment in the property that may be required to keep
it running. I have been wondering if it's come to the point where Mellon may have to reach
into his own pocket and start paying for ties-rail-ballast-etc and thinking this may be the time
to unload?
  by gokeefe
 
Gilbert B Norman wrote:NS's 2019 Annual Report notes there are 20M shares of Treasury Stock. At $190/sh, that means NS could "reach into Topper's oat bin" and pull out enough "oats" for a $550M stock purchase of Pan Am. Those shares are not cancelled, as are "buybacks", so no EPS measurement would be diluted.
Bingo.

Mr. Norman,

I took a look at CN's 2019 annual report and couldn't find a direct indication of the number of treasury shares on hand.

With regards to ownership and tax questions it seems worth noting that equities are much easier to transfer on an inter generational basis than cash.


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  by MEC407
 
S1f3432 wrote: Tue Aug 04, 2020 5:40 pm If I recall correctly Mellon paid $20M for MEC and $24 for B&M and rumors have long held that he quickly
recovered the price of his purchases thru the sale of real estate. What would $42M in 1981 be
worth in 2020...
According to www.usinflationcalculator.com, $44 million in 1981 = $125 million in 2020. But that's probably not an accurate way to determine what today's combined MEC-BM system is worth, for a whole host of reasons.
  by S1f3432
 
Value of the property compared to 1981 would have to take into consideration that the
property is now in worse physical condition with at lot less traffic. The ratio of originating
vs terminating traffic is likely worse as well with the originating carrier claiming the largest
share of the pie.
  by gokeefe
 
I think it is highly devatable whether or not the main line between Portland and Plaistow is in better or worse condition now than it was in 1981.

I would think given all the passenger work and Class 4 track conditions it is insignificantly better condition than 1981. The B&M West end is almost certainly worse off but parts of the network in Maine and New Hampshire are probably better off.

A lot of physical facilities and track miles have been abandoned or disposed of since then. The associated environmental cleanups are no small thing and would mean fewer environmental liabilities.

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  by newpylong
 
We're talking a fraction of the total mileage that is in better condition. This is more than offset by the percentage of trackage in deplorable condition. And we aren't really talking about night and day either, the entire Portland Division was 40 MPH until the late 80s, one Class lower than some of that track today, but the same freight speeds.

Also the purchase would be for far less trackage than was owned in 1981, even 2001 for that matter. So much has been sold to MassDOT.

I wish we could do a poll on this forum for sale price.
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