Canadian Pacific to buy DM&E railroad for $1.48 billion

Canadian Pacific to buy DM&E railroad for $1.48 billion Canadian Pacific Railway announced late Tuesday that it plans to acquire Dakota, Minnesota and Eastern Railroad Corp. for $1.48 billion in cash plus future contingent payments potentially worth up to $1 billion.
   The move expands Canadian Pacific’s network by 2,500 miles and gives it increased access to Midwest markets such as coal, ethanol and agriculture.
   DM&E is a regional railroad and has applied to become the third line hauling coal out of the Powder River Basin in Wyoming. The BNSF Railway and Union Pacific serve the Powder River Basin, North America’s largest and most rapidly growing source of low-cost, low-sulphur coal and the largest single rail market in terms of volume.
   Start of construction on a planned Powder River expansion project would trigger a $350 million additional payment to DM&E shareholders. Further contingent payments of up to $700 million would become due upon the movement of specified volumes of coal from the Powder River Basin between now and 2026.
   Canadian Pacific, one of the six major railroads operating in North America, said it plans to invest $300 million to further upgrade the DM&E during the next few years.
   “Canadian Pacific is excited about the prospect for growth in the coal-rich Powder River Basin,” said Fred Green, Canadian Pacific's chief executive, in a statement. “The DM&E’s favorable geographic position provides a unique ability to create an efficient and competitive additional link to Midwestern and Eastern utilities.”
   “The combination of our two companies and the resulting efficiencies will be very positive for our customers,” DM&E Chief Executive Kevin Schieffer added.
   The DM&E is the largest U.S. regional railroad and the only one that connects and interchanges traffic with all seven Class I railroads. It connects with the Canadian Pacific at Minneapolis and Winona, Minn., and Chicago.
   DM&E, based in Sioux Falls, S.D., had sales of $258 million in 2006 and forecasts a 9 percent increase in revenue to $280 million this year. The company’s assets include 1,000 employees, 7,200 rail cars and 150 locomotives. It serves eight states.
   Canadian Pacific, based in Calgary, Alberta, said it has obtained financing for the deal and has suspended its share repurchase program. The transaction is expected to close within 30 to 60 days, but Canadian Pacific will not exercise control over DM&E for at least a year while the U.S. Surface Transportation Board completes a review of the merger to make sure customers are not harmed by the move. During that time shares of DM&E will be placed in an independent voting trust.
   The STB in 2006 granted DM&E final permission to build a 280-mile line to the Powder River Basin with extensive environmental mitigation conditions. Environmental groups had blocked construction for several years through legal maneuvers.
   The railroad said its goal is to transport about 40 million tons of coal a year in the startup of the new line, and will increase it to about 100 million tons a year.
   Utility companies have complained about the lack of rail competition from the Powder River Basin, citing routine service breakdowns in the past two years by the Union Pacific and BNSF railroads.