In the Newswire, I see that Moody’s has downgraded CPR’s debt to one step above junk bond status because of its purchase of the DME.
I’m assuming that building the Powder River extension would require incurring more debt. Does the new status from Moody’s affect the CPR in this regard? If so, how?
Without looking at the particulars of CPR for myself, the quick answer is yes because their financing costs will increase. Very likely, any new debt, especially unsecured debt, will require that they pay a higher interest rate. It may even depress their stock price slightly because potential buyers will be looking for a higher yield to offset the increased risk. If they were to slip into junk status, that could have a large financial effect because many institutions – e.g. pension funds – are barred from holding risky securities and they would have to bail out of CPR securities.
You may want to read the history of the C.P.R. regarding pension funds, very interesting.
I wonder if CP considered a long-term lease of DME/ICE instead of outright purchase? A merger based on an exchange of shares would have been unlikely since the current shareholders would strongly oppose the resulting dilution of their interest.
Leases are not new. NKP leased W&LE in 1947 and N&W leased Wabash in 1964.
DM&E was a closely held company and much of the stock was held by private-equity investors who were eager to cash out rather than end up with more stock. So I doubt that a lease or an exchange of shares was ever in the cards. IMO, they got a good deal. The owners were faced with making big-time commitments and risks to realize DM&E’s potential. Instead they grabbed CP’s offer.
From the WSJ:
“The firms, which between them now own about 30% of Dakota Minnesota & Eastern Railroad Corp., are divesting themselves of their stakes following the sale of the company to rival Canadian Pacific Railway Ltd. late Tuesday for $1.48 billion, with an additional $1.06 billion payable if targets are met between completion of the deal and 2025.”
‘The four firms – F&C Private Equity Trust PLC, Candover Investments PLC, Electra Private Equity PLC and Cinven Ltd. – became majority owners of DM&E Railroad in a 1986 buyout after forming a consortium with San Francisco-based peer Lombard Investments Inc. At the time, leveraged buyouts of U.S. companies by U.K. firms was rare.
‘Hamish Mair, head of private-equity funds at Edinburgh-based F&C trust, said, "We will make 20 times our money in the deal at a 40% internal rate of return. Management, led by [Chief Executive] Kevin Schieffer, has done a great job and our long-term investment has paid off.”’
The financing of the deal may unwind…look at all the trouble Cerebrus is having with all their announced “highly leveraged” deals…Chrysler is getting wobblier every day too.
Source?