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CPR to buy northern U.S. railway

In a deal expected to increase its access to grain, ethanol and coal markets in the U.S. Midwest, Canadian Pacific Railway (CPR) will pay US$1.48 billion cash to buy the Dakota, Minnesota and Eastern Railroad Corp. (DM&E), the company announced last night.

Headquartered at Sioux Falls, S.D., the DM&E is the only Class II railroad that connects to all seven North American Class I railroads, connecting with CPR track at Minneapolis, Chicago and Winona, Minn. The proposed deal would make the railway part of CPR’s U.S. network.

DM&E, which employs about 1,000 people, owns 7,200 rail cars and 150 locomotives, and runs 2,500 miles of track over eight states, posted freight revenues of US$258 million in 2006. It expected to increase those revenues to $280 million over 275,000 carloads in 2007, CPR said in a release.

Grain traffic makes up 36 per cent of the U.S. railway’s freight revenue, second only to industrial products (48 per cent). Fertilizer adds another three per cent.

According to CPR, the DM&E’s long-term plan includes expansion into Wyoming’s Powder River Basin, where it aims to become the third rail carrier in the coal-rich area, considered to be the largest single North American rail market in terms of volume. Coal now makes up six per cent of the U.S. railway’s freight revenue and 15 per cent of its carloads.

CPR’s purchase deal includes future contingent payments of up to US$1 billion, including $350 million if the Powder River expansion project is under construction before the end of 2025, and up to about $700 million due on the movement of set volumes of coal out of the region through this extension before that time.

Shares of DM&E will go into an independent voting trust while the proposed deal awaits the review and approval of the U.S. Surface Transportation Board, a process that CPR said should take “less than a year.”

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