January 30, 2001 JoC Online (Journal of Commerce) by Lawrence H. Kaufman

Canadian National to buy Wisconsin Central for $1.2 Billion

For the second time in little more than a year, Canadian National Railway Co. is moving to increase its presence in the United States with the announcement that it plans to acquire Wisconsin Central Transportation Corp. for US$1.2 billion.

The two companies said early today that their boards approved a merger agreement under which CN will acquire all of the common stock of WCTC for cash at $17.15 a share, a 21% premium over the closing price of Wisconsin Central stock on the Nasdaq market last Friday.

In December 1999, CN and Burlington Northern Santa Fe Corp. surprised the transportation world and regulators with the announcement that they intended to combine into the largest rail system in North America. That deal was derailed when vigorous opposition by other major railroads in the United States and Canada persuaded the federal Surface Transportation Board to impose a 15-month moratorium on mergers between major railroads. CN and BNSF abandoned their merger last July.

Wisconsin Central is not a Class 1 carrier, although a proposed STB rule-making would reclassify it as such and presumably would make it subject to the moratorium, which expires in June.

Paul M. Tellier, CN's president and chief executive, told reporters and securities analysts this morning that he considers the deal a minor transaction. CN has the right to walk away from the deal without penalty if the STB treats it as a major transaction., he said. Sources said Tellier and Thomas Power, WCTC's chairman, president and chief executive, met with STB Chairman Linda J. Morgan on Monday to inform her of their plans.

WCTC has not been without controversy. Following years of aggressive expansion since its 1987 founding that brought the company major rail investments in Britain, Australia and New Zealand, the founding partners had a falling out, and Edward Bernhardt was replaced in 1999 as chairman, president and chief executive by Power, also a company founder.

Bernhardt mounted an unsuccessful effort in late 2000 to recapture control of the company. In fighting him off, WCTC retained an investment bank adviser to maximize shareholder value, effectively putting the company in play.

WCTC is selling its TranzRail Holdings investment and has begun the process of selling its 42.5% interest in English, Welsh & Scottish Railway Holdings, Ltd., the principal freight railroad in Britain. Tellier said he expects WCTC to carry out its commitment to sell the minority equity investments as soon as possible, although the sale of EWS may take longer while its management improves operating and financial performance.

"CN acquisition of WCTC makes sense for several reasons," Tellier said. "First, it will secure a link in CN's NAFTA network – the main-line railroad connecting Chicago; Superior, Wis.; and CN's transcontinental network across Canada. Under a 1998 agreement, WCTC already hauls CN freight between Superior and Chicago. Single-line service over this link under CN ownership will improve the competitiveness of CN-WC and their customers in Canada-United States trade, which is growing annually at more than 10%.

"Second, the efficiencies that will result from the acquisition offer the prospect of enhancing CN's top-line growth in the domestic U.S. marketplace and benefitting customers with improved through service at the busy Chicago gateway."

The transaction is expected to contribute modestly to CN's earnings and cash flow in the first year following STB approval, Tellier said.

"The CN-WCTC transaction is a simple, straight-forward, pro-competitive, end-to-end combination," Tellier said. Not a single ‘two-to-one' point will arise in the U.S. as a result of the merger, and there will be no other significant adverse impacts on competition. CN is committed to keeping gateways open. Equally important, CN will offer shippers a service implementation plan that will assure that service levels on the combined CN-WC will be equal to, or better than, current levels."

CN and BNSF had made the same commitment last year.

In addition to STB approval, the transaction is subject to approval by a majority of WCTC stockholders, who are expected to vote on the transaction as soon as possible. CN shareholders are not required to approve the transaction.

CN, which acquired Illinois Central Railroad in 1999, spans Canada and mid-America, from the Atlantic and Pacific oceans, to the Gulf of Mexico, serving the ports of Vancouver and Prince Rupert, British Columbia; Montreal, Halifax; New Orleans; and Mobile, Ala., and the key cities of Toronto; Buffalo; Chicago; Detroit; Memphis; St. Louis; and Jackson, Miss., with connections to all points in North America.

CN announced last week that it had 2000 net income of US$530 million on revenue of US$3.7 billion.

The synergy of the deal is in CN's ability to take Wisconsin Central-originated traffic that now mut be interlined at Chicago and keep it on its own CN-IC system for a much greater distance before it must be transferred to another eastern or western U.S. carrier.

WCTC operates over approximately 2,850 route miles of track and trackage rights in North America. It has approximately 2,200 employees, 244 locomotives and 13,900 railcars. Results for 2000 have not been released, but are expected to top the 1999 record of $363 million.

WCTC's principal gateways are Chicago; Duluth, Minn./Superior, Wis.; Green Bay, Wis.; Milwaukee; Minneapolis/St. Paul; and Sault Ste. Marie, Ontario.