If you had 8 billion dollars and wanted to invest it in the rail industry, would you buy stocks in Canadian Pacific Railway, some other railroad, or build your own shoreline railroad around Chicago?
While brushing up on the latest in the rail industry, there’s a couple numbers that don’t seem to add up. I’m just a simple farmboy whose resume includes the fourth ranked party school in the nation at the time of my graduation. Corporate financing is not my strongest subject matter. Maybe someone can help explain this.
Canadian Pacific Railway has made an offer to buy Norfolk Southern for 27 billion dollars. Norfolk Southern’s CEO has stated 45 billion wouldn’t be enough and more or less told Canadian Pacific to go pound sand, but Canadian Pacific is taking the issue to NS shareholders for a proxy vote. It’s odd enough the sixth largest railroad wants to buy the third largest with Norfolk Southern being roughly twice the size of Canadian Pacific. Nevertheless, the offer is 27 billion on the low and 45 billion on the high end.
Frank Patton who wants to create a shoreline railroad says it will cost 8 billion for a 278 mile railroad from Northern Indiana to Janesville, Wisconsin. Frank Patton supposedly has 14 investors for this speculation project. 27 Billion is the offer for the third largest railroad in North America behind Union Pacific and Burlington Northern Santa Fe and 8 billion to build a 278 mile shortline.
This blog is by no means Barron’s, the Financial Times, or the Wall Street Journal but it’s my opinion either Frank Patton or the CEO of Canadian Pacific is out of their minds. (Maybe both of them) Either Canadian Pacific’s offer of 27 billion for the third largest railroad is absurdly low or there is no possible way for a reasonable payback on a loan to build an 8 billion dollar shortline around Chicagoland.
When comparison to 27 billion for Norfolk Southern, you don’t even have to know the specifics about rail tariff rates to figure the return on an 8 billion dollar investment in a shoreline bypass is probably terrible low. Clearly Patton’s shortline dream is going to require a federal guaranteed loan, meaning should Great Lakes Basin go bankrupt and become insolvent, the federal government will cover the loan to the banks. Again, without knowing the specifics other than a measly shortline cost 8 billion to build and Norfolk Southern could fetch between 27 and 45 billion, I’d have to question the wisdom of the federal government cosigning an 8 billion dollar loan.
Again, if you had 8 billion dollars and wanted to invest it in the rail industry, would you buy stocks in Norfolk Southern or build your own shoreline railroad around Chicago? 8 billion buys you more than a quarter of the third largest railroad in North America.
It’s a no brainer. Unless you have somebody with a lot of knowledge in managing a railroad backing you up, the wise investment is to buy the stock in the existing railroad. Kind of makes a guy wonder…who is really the money behind Frank Patton and Great Lakes Basin.