First, KCS-MidSouth. Now…? - Kansas City Southern Railway Co. may be sold

North-south Kansas City Southern, which has smoothly completed its merger with east-west MidSouth, may be ready to play a role in another, bigger consolidation

As well as it's been performing in recent years, few people really expected Kansas City Southern Railway to remain out there by itself forever. It simply looked too attractive.

Parent KCS Industries had been non-committal about the whole matter of possible structural change, including divestiture of the railroad, a move that would turn KCSI into a company almost totally involved in financial services. But the rumors kept building. During the week of May 16, KCSI stock prices went up, and at the same time so did the price of Burlington Northern.

Something happening? BN did cancel a long-scheduled trip by securities analysts set for early June. BN also asked, even earlier, for a rescheduling of a major story in Railway Age. Cause and effect? Maybe, maybe not. (KCS Railway, in the meantime, had no problem in talking with both Railway Age and the analysts about what has already taken place, about its 1993 consolidation with MidSouth.)

So, is KCS Railway on the block, in play? It would seem so.

Who are the players? BN is regarded as the front-runner, but the speculation last month had Santa Fe in there as well as CP Rail and possibly Illinois Central.

KCS has a strong base in coal and chemical traffic and, especially with MidSouth, in paper industry traffic. It has a good port facility on the Gulf of Mexico. It has a good motive-power fleet and a good plant, and it's well under way with a program to upgrade the former MidSouth lines. It could be an attractive acquisition, at the right price.

* "Strategic review." All KCSI was saying late last month was that it's continuing "the strategic review of operations announced earlier." It's retained CS First Boston Corp. and Mercer Management Consulting "to assist in that part of the review relating to transportation operations."

Landon Rowland, president and CEO of KCSI, said that discussions were under way with "several rail transportation companies." But KCSI also said that the discussions "are preliminary and no specific proposals are under consideration. We are looking at the opportunities available in all of our business segments, in an effort to enhance value to our stockholders."

Is anything likely to happen soon, as far as KCSI and its railroad are concerned? KCSI said that the "review process is expected to continue into the summer." In the meantime, however, KCS has proved that it, at least, knows how to put a pretty big railroad merger together.

Just over a year ago, the Interstate Commerce Commission approved the acquisition of MidSouth by Kansas City Southern, resulting in the creation of a 2,800-mile railroad linking north-south KCS and east-west MidSouth, with a connection at Shreveport, La.

How has the consolidation worked in Year 1? Excellently, despite the glitches and hiccups that anybody would expect from this kind of combination.

As President and CEO George Edwards puts it, "From the very beginning, we said that acquiring the MidSouth would not dilute our earnings. Now, just about a year later, I can say that the MidSouth South has from the very first day been a positive contributor to KCS."

Measures being put in place, he says, "will begin to have a positive impact in the second quarter, and our last two quarters should be especially strong. Further, we anticipate that 1994 will succeed 1993 as the best year in KCS history - a new record which will last only until 1995, which should be even better."

What measures, what improvements are being put in place? Edwards talked with Railway Age and with security analysts a few weeks ago. He talked about locomotives, freight cars, and fixed-plant improvements.

KCS has a modern locomotive fleet, MidSouth had a fleet inherited from Illinois Central, its ancestor. KCS has added 28 remanufactured units from Morrison Knudsen and AMF. It is also beefing up the freight car fleet.

MidSouth track was a different story. It required major work, mostly replacement of crossties but also installation of welded rail and construction of passing tracks. Tie work is on schedule and rail installation is underway, although most of it will take place in 1995. Nine new sidings will be built on the former MidSouth, now the KCS Eastern Division.

* A $150 million investment. By the end of 1994, Edwards says, a number of major track renovations should be completed to raise train speeds to 40 mph, with a $150 million investment and with a front load during the first two years of ownership of MidSouth.

This acquisition, he says, enabled KCS "to establish new and very profitable long-haul routes, and to provide customers with streamlined and competitively priced service to markets with expedited delivery times. It's really opened the door for us on intermodal, where we are projecting increasing revenues from $17 million to $57 million over the next five years, an increase of over 200%."

But KCS now has entry into Dallas, with track and an intermodal ramp facility acquired from Santa Fe. When Burlington Northern closed its ramps at Dallas (and Houston), KCS and BN entered into a haulage agreement under which KCS will move BN intermodal traffic between Dallas and the Pacific Northwest via Kansas City. The sixth-morning availability service doesn't seem all that competitive, but KCS says it's expecting to move a train a day in each direction. In addition, KCS has an alliance with Schneider National for interlining of trailers from connections to a ramp in Oklahoma for movement to Walmart in Bentonville, Ark.

KCS has also reopened, at least temporarily, a yard at Bossier City, La., to supplement its operations at Deramus Yard in Shreveport because of increases in traffic. In the meantime, it's expanding capabilities at Deramus Yard and adding a bypass route for through traffic.

* A broader traffic base. One of the advantages KCS gained by acquiring MidSouth was a spreading of its traffic base. Thus, KCS is not as dependent on coal traffic as it used to be. But coal is still a major commodity, and the railway has made important new agreements with major customers.

KCS has worked out an agreement with its largest customer, SWEPCO (Southwestern Electric Power), to continue hauling coal to four coal-fired electric generating units through 2006, and it's renewed a contract with Kansas City Power & Light for coal supply through 2000. The agreement with SWEPCO came about as a result of negotiations resolving a contractual dispute in litigation involving KCS and Burlington Northern, originating road for Powder River Basin coal. KCS says that these new agreements won't have adverse financial impact and are consistent with the goals of the railway's five-year business plan.

Edwards says that grain traffic looks good, the paper and paper-related market shows signs of rebounding, intermodal revenues are increasing, coal is solid business, and plant expansions are coming.

Glitches and hiccups? "In some cases, service has not been maintained to the level I or Jim Dehner [executive vice president and chief operating officer] wanted it to be," Edwards says. "Our customers have been supportive, realizing that the service we'll be able to offer once this transition has been achieved will be far more comprehensive and flexible than any they've ever enjoyed before. They've been patient and understanding. On the other hand, we are not the least bit patient or understanding. We wanted the problems fixed on Day 1. We want them fixed today. No one at KCS is tolerant of any glitches in service, no matter how temporary and no matter how forgiving our customers may be.

"Our emphasis on customer service in recent years has made us all very dissatisfied with anything less than top-notch service, across the board, all the time, no excuses. And we have taken steps to modify our transition plan and to accelerate portions of the plan where it can be helpful to customers."

COPYRIGHT 1994 Simmons-Boardman Publishing Corporation
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