(Bloomberg News circulated the following story by Hugo Miller and Adam Satariano on September 5.)
NEW YORK — Canadian Pacific Railway Ltd., the country’s second-largest railroad, plans to acquire Dakota, Minnesota & Eastern Railroad Corp. for $1.48 billion to benefit from rising demand for moving coal and other commodities.
The price may rise by as much as $1 billion, depending on construction costs for a project in Wyoming and future payments related to coal deliveries, Calgary-based Canadian Pacific said in a statement late yesterday. The company expects to complete the purchase of closely held Dakota, Minnesota & Eastern within two months.
The acquisition would expand Canadian Pacific’s network by 2,500 miles (4,020 kilometers) and provide access to U.S. markets for transporting coal, ethanol and agriculture products. Dakota, Minnesota & Eastern, which had freight revenue of $258 million in 2006, is the largest regional rail line in the U.S., Canadian Pacific said.
“Canadian Pacific looks at this as a growth opportunity because of DM&E’s ethanol markets,” Anthony Hatch, an independent rail analyst in New York, said. “They already do a lot of grain and fertilizer business, and this adds to that.”
The Federal Railroad Administration rejected the U.S. railroad’s application in February for a $2.33 billion loan to expand in Wyoming’s Powder River Basin area because of what the regulator called an “unacceptably high risk.” Chief Executive Officer Kevin Schieffer has said he plans to spend $6 billion to add as much as 262 miles of new track westward to allow the railway to haul 100 million tons of coal a year from the region.
Union Pacific Corp. and Burlington Northern Santa Fe Corp., the two biggest U.S. railroads, now carry about 400 million tons of coal yearly from the region.
Canadian Pacific shares traded in Germany fell 1 percent to C$72.76 as of 9:13 a.m. in Frankfurt from C$73.47 at yesterday’s close in Toronto. The stock has risen 20 percent this year.
Eight-State Network
Dakota, Minnesota & Eastern, based in Sioux Falls, South Dakota, has 1,000 employees, 7,200 rail cars and 150 locomotives operating in eight states. Canadian Pacific said it plans to spend $300 million upgrading Dakota, Minnesota & Eastern’s network over the next several years.
The acquisition, which is subject to approval from the U.S. Surface Transportation Board, will add to Canadian Pacific’s earnings per share in 2008, the company said. Canadian Pacific reiterated an earnings-per-share target for 2007 of between C$4.30 ($4.09) and C$4.45, excluding foreign exchange and other unspecified items.
The Canadian railway said it has suspended a share buyback begun in March to fund the acquisition and has secured “fully committed” financing for the purchase. Company spokesman Mark Seland said he would be able to give details of the financing later today.