A "game" that I have sometimes "played" is to put myself in Mr. Haverty's shoes and contemplate the next strategic move for KCS.
Mr. Haverty (born June 11, 1944) experienced, insightful, hardened, a strategic long term disciplined visionary, with no obvious and equally capable successor in the wings, probably has about three more years in the "chair".
I assume that for the short term every move will serve a dual purpose. Increase the financial security of KCS but, don't undertake any projects which would inhibit the value of KCS as an acquisition.
So, for example I think the mini hump at Shreveport, though necessary for an independent KCS could be redundant for a potential acquiror. Therefore a no-go.
However, a bypass around Victoria, Tx and thereby accessing the Victoria Barge Channel and potentially new trackage from Victoria to Alice might be worthwhile.
Brownsville-Matamoros bridge while avoiding any chance of UP being a bridge carrier between the Brownsville Channel and KCSM -- high priority.
Strategic and quiet lobbying for favorable positioning with I-69 rail corridor (The Trans Texas Corridor) definitely important.
Two years of paying down debt to say the $1.2B level, and ensuring the independence of KCS by supplementing a less capable successor by further augmenting Mr. Erdman's role, and reinitiating a dividend of perhaps $.80 annaully. Worth thinking about.
Looking for thoughts.
During the year end conference call there were several references made that the increasing free cash flow--expected to approximate $140M during 2011--would enable the extinguishment of the remaining high cost bonds and the initiation of a dividend.
There was also the expectation that the Series D Convertible Preferred Shares which are redeemable--at the company's discretion after February 20, 2011--for 7M common shares, would take place during May, 2011. This, completes the share dilution that was used to finance the acquisition of the Mexican concession (KCSM)--a 7% dillution to the current shares outstanding.
The Series C Convertible Preferred Shares were redeemed in July, 2008. They were converted into 13.4M common shares--this was a 24% dilution of the then existing 55.8M shares.
I think your distance calculations from KC to Laredo need reworking. I peg the road distance from KC to Laredo via Shreveport, Houston, Victoria at 1105 miles. Using an airplane mileage web site the distance was approx 850 miles. It would be impossible for UP to have a route from KC to Laredo that was shorter than "as the crow flies".
KCS by rebuilding the Macaroni Line between Rosenberg & Victoria eliminated the necessity of using 160 miles of UP tracks. I peg the distance of UP trackage being used between KC & Laredo as:
Beaumont, Tx to Rosenberg, Tx 115 miles
Victoria, Tx to Robstown, Tx 90 miles
Granted, 205 miles of UP trackage rights is not "great". But, KCS also picked up "neutral" access to the two terminal railroads in Houston (Houston Belt & Terminal RR & the Port Terminal Railroad Association)and "clear" run rights through Houston that are not specific to a single rail line. Houston being the 6th largest metropolitian site in the US.
Great comment. I agree. But - in my opinion changes in ocean shipping will shift cross-continental US international trade from rail to ship + regional rail haul. The longer hauls will be domestic products and intra-continent moves, for which KSU + CP are suited.
KCS' route from Laredo to Kansas City is 40% longer than UP's, uses UP rights for nearly 400 miles, crosses Rich Mountain on 2% grades and winds around the hills of northeastern Oklahoma, and connects to an equally circuitous single-track CP route to Chicago via Savannah Illinois.
This is not the stuff of which high-volume railroading is made.
Deep-pocketed UP had great dreams for the El Paso-Topeka "Golden State Route" but quickly realized it was an unfillable hole. They pretty much gave up trying to beat BNSF for LA/Chicago high-value traffic and re-focused on FAK in that corridor, which is very profitable.
KCS and CP have nowhere near the resources to make Mexico-Canada a big money-maker; in any case, it will never rival the volumes that made BNSF rich.
Mr. Starling, during the Q3 conference call, was lobbed a beach ball question regarding the identity of the equity investments on KCS' financial statements which showed an increase in earned income.
A simple question (Pabtex, Transerve, Southern Capital)that should have been a home run and could have been answered by any shareholder who has reviewed the annual financial statements. Mr. Starling had to be prompted.
I think Mr. Haverty must now make a decision--and we won't be privy to the answer until much later. At 66 years of age Mr. Haverty realizes his own mortality, the importance of family and grandchildren, and the protracted time frame required to complete a significant railroad project.
He has, over the last 30 months and in accordance with his SEC approved/recognized application, regularly sold part of his holdings of KSU shares. He currently owns approx 550k shares or about 50% of his holdings of 30 months ago.
The question becomes--does Mr. Haverty seek a deal with a larger Class I railroad which would best maximize the employment security of KCS employees--or, does he pretend that a successor can rise to the position.
Likely, it is a decision that should be made and the actions initiated prior to the pending IPO of Ferromex/Ferrosur and perhaps, shortly after the US Circuit Court Q1 ruling regarding CN's buyout of the EJ&E.
(Mr. Haverty has recently, in an interview, stated his conviction that KCS will remain independent for many years to come.)
You are an excellent source of information about KCS, but your assertion that a merger with a larger Class 1 would "best maximize the employment security of KCS employees" is a fantasy or deliberate prevarication.
A merger would completely eliminate the entire management cohort of KCS. There will be absolutely no need for I/T, accounting, or sales staff. Yes, SOME of the train service employees will survive, but they'll be merged with the seniority roster of the acquirer. Since KCS has been hiring at a relatively rapid rate because it's been out-growing its competition on a percentage basis, most of the newly hired will be back on the Extra Board, bumped by somewhat more senior folks from nearby outposts of the acquirer.
CSX would be the least damaging to train service employment, because it has only haulage into Kansas City and KCS has relatively little employment in New Orleans.
Okay, so the "Stockholder's Rights Plan" aka "Poison Pill" was allowed to lapse.
KCS was faced with a "mountain" of bond debt that matured in 2012:
$460M @ 9.375%
$178M @ 12.5%
This, was incurred from the purchase of the Mexican franchise. The above was dealt with earlier this year.
Now, the current bond issue--which will mature in 2020 and is for 6.625% (along with current cash flow) is being used to call the 7 5/8% bonds due in 2013 & the 12 1/2% bonds due in 2016.
These moves, in conjunction with the improving traffic flows from Mexico resultant from the track sharing agreements with Ferromex/Ferrosur, solidify the KCS rail franchise.
Exciting and significant long term financial progress. The financing "hump" which necessarily resulted from the purchase (and arm wrestling) for the Mexican franchise--has now been removed. The defensive moves for self-preservation are completed.
Game set match Beagle....a well thought out financial and expansion plan followed through to fruition. Nice work KSU, impressive results illustrated by the year over year carload growth chart and the stunning increase in cash flow.
The "Stockholder's Rights Plan" aka "Poison Pill" that will expire on October 11, 2010--I have been trying to digest the ramifications of various scenarios i.e. renewal, allowing to lapse, etc.
My conclusion. As a long standing KCS shareholder I am not in favor of an automatic 5 year term renewal. (That is what happened in 2005. The existant "Poison Pill" was renewed for an additional 5 year term.) At the time (2005), KCS' takeover of the KCSM (TFM) was still in flux and the company needed the opportunity and time to consolidate and realize the value of the combined assets. The 2005 "Poison Pill" gave management that opportunity.
The "job" is not yet finished. However, I am not in favor of an additional 5 year "Poison Pill" renewal. I understand that an additional 18 months is desireable to a maximum of 36 months. Anything in excess of that time frame would be contrary to my interests as a shareholder.
I have decided to write to the members of the Board of Directors to convey my perspective.
The service disruption experienced by KCSM/KCS due to the flooding and subsequent damage to the Anahuac rail bridge has exposed a critical weakness in the KCS rail system.
KCS' reliance on a single route across the flood suceptible lowlands south of the Rio Grande which connects the US & Mexican railroads,needs to be addressed. Too much of the trade between the US and Mexico are reliant on a single track which, due to the flat terrain, results in bridges and bridge approaches, with minimal clearance over flood susceptible rivers.
It was (I recall) less than five years ago that the Ferromex's little used International rail bridge at Precido was and remains (I think) incapacitated due to flooding.
Obviously, the Mexican government is also going to be very motivated in rectifying this vulnerabiity.
It will be interesting to see what evolves and whether some hint of a strategic resolution to this problemn is presented at the Q2-2010 Quarterly Report.
Beagle: I'm not sure what can be done to address this short of building an entirely new route. I believe that hurricane damage is just something that carriers that operate in areas prone to tropical storms just have to absorb when it does occur. I go back far enough to remember the hurricane that hit Erie Lackawanna in the early 70s (Agnes?)and essentially forced the railroad into bankruptcy. Of course, E-L was a weak railroad that had inherited a ton of debt from the Lackawanna during the merger in 1960 and operated in an overbuilt region during the over-regulation era of the ICC. Nonetheless, the storm made operations for a number of months impossible. The hurricane and the OPEC oil embargo of 1974 plus the resulting steel slowdown and recession dealt the company a mortal blow that it couldn't recover from.
Do you have a take on the effects of this on the 3RD quarter earnings for KSU? I'm thinking that it will be minimal since insurance will cover damage above the self insured limits and much of the embargoed traffic will be "caught up" in the coming weeks.
If you were Michael Haverty--exCEO and exPresident--now Chairman and designated/continuing longterm strategic planner--does the Stockholder's Rights Plan aka "Poison Pill"...should it be renewed??
October 11, 2010 is just around the corner...
from the 2009 Annual Report:(pg 75)
Stockholder Rights Plan. On September 27, 2005, the Board of Directors of the Company declared a dividend distribution of one right for each outstanding share of the Company’s common stock to stockholders of record as of the close of business on October 12, 2005, replacing a previous Rights Agreement that expired on October 12, 2005. Each right entitles the stockholder to purchase from the Company one one-thousandth of a share of Series A Preferred Stock (or in certain circumstances, common stock, other securities, cash or other assets), at a price of $100 per share (both shares and price are subject to adjustment periodically to prevent dilution). The rights are traded with the Company’s common stock.
The Rights Plan has certain anti-takeover provisions that may cause substantial dilution to a person or group that attempts to acquire the Company without the approval of the Board of Directors. The Rights Plan will not interfere with any offer for all of the outstanding common stock that has the approval of the
Kansas City Southern Independent Directors. The rights will become exercisable after a non-approved person or group has acquired, or a tender offer is made for, 15% or more of the common stock of the Company (13% or more in the case of certain acquisitions by “Adverse Persons”). Right holders (other than the acquiring person or group) may then exercise their rights at the then current purchase price, and receive the number of shares of Preferred Stock (or in certain circumstances, common stock) having a market value of two times the purchase price of the rights. Additionally, if the Company is thereafter merged into another entity, or if more than 50% of the Company’s consolidated assets or earning power is sold or transferred, holders of the rights may exercise their rights at the then current purchase price and receive common stock of the acquirer equal to two times the purchase price of the rights. KCS may redeem the rights for $0.0025 per right until a triggering acquisition. The rights expire October 11, 2010.
I think there are too many shares now held by institutional investors to make such a ploy effective.
I am looking forward to the Q2 quarterly report. It should give us some significant insight into the immediate strategic priorities. It appears the return to a system wide carloading rate of 37,000/week has resulted in traffic bottlenecks at the Jackson, Ms and Shreveport, La yards. Both these yards are reporting dwell times in excess of 30 hours.
Obviously, Shreveport is the KCS' main hub. Jackson, am I correct to assume an increased traffic interchange with CN Rail is the cause?
Obviously, these bottlenecks need to be cured if the railroads productivity is going to increase.