Business Context and Reporting Period
This Form 6-K filing by Canadian Pacific Railway Limited (CP) and Canadian Pacific Railway Company, dated January 2, 2014, announces a strategic asset sale. CP has executed an agreement to sell the west end of its Dakota, Minnesota & Eastern (DM&E) line to Genesee & Wyoming Inc. (G&W). The transaction concludes a strategic review process initiated in December 2012.
Key Financial Metrics and Transaction Details
- Purchase Price: Approximately USD $210 million, subject to adjustments for inventory, equipment, and vehicles.
- Asset Scope: Approximately 660 miles of track between Tracy, MN, and Rapid City, SD, including connecting branches and leased trackage.
- Volume: The lineship handles approximately 52,000 carloads annually (grain, bentonite clay, ethanol, fertilizer).
- Accounting Impact: CP anticipates a net after-tax write-down of approximately USD $240 million, to be recorded in Q4 2013 financial statements.
- Cash Flow: The transaction is described as cash positive for CP.
- Buyer Projections: G&W expects the acquisition to generate annual revenues of approximately $65 million and be immediately accretive to book and cash earnings per share in 2014.
Material Changes and Strategic Impact
Following the sale, CP will retain ownership and operation of approximately 1,900 miles of former DM&E track. The divested assets will form a new railroad named the Rapid City, Pierre & Eastern Railroad. The filing states the sale will not have a material effect on CP's anticipated future earnings. The transaction is intended to strengthen CP's network for its remaining customer base.
Guidance, Outlook, and Risks
Closing Conditions: The sale is expected to close by mid-2014, subject to approval by the U.S. Surface Transportation Board and satisfaction of customary closing conditions.
Employment: G&W expects to hire approximately 180 employees, primarily from the current workforce on the rail line.
Risks and Contingencies: The filing includes extensive forward-looking statements cautioning that actual results may differ. Key risks include regulatory approval failure, legal proceedings, disruption of operations, labor disputes, and general economic conditions. There is no guarantee the acquisition will be completed within the anticipated timeframe.
Investor Verification Checklist
- Verify the final purchase price and closing adjustments once the transaction closes.
- Confirm the exact timing of the USD $240 million write-down in CP's Q4 2013 financial statements.
- Monitor the U.S. Surface Transportation Board approval status for the mid-2014 closing target.
- Review CP's Q4 2013 earnings release to confirm the "cash positive" nature of the deal and the lack of material impact on future earnings.
- Assess G&W's ability to integrate the 180 employees and achieve the projected $65 million in annual revenues.