CN posts 'For Sale' sign - Canadian National Railways

Railway Age, June, 1995 by Greg Gormick

The People's Railway is no more. After nearly 78 years, Canadian National Railways is being privatized by the Liberal government of Prime Minister Jean Chretien.

"It's the biggest share issue in Canadian history," said Transport Minister Doug Young after tabling the CN privatization legislation in the House of Commons in Ottawa. "I would think it would be in excess of $1.5 billion [C] and probably less than $2 billion. It's not going to be easy."

Underwriting for the issue will be handled by ScotiaMcLeod, Inc., Nesbitt Bums, Inc., and Goldman, Sachs & Co., which the transport minister described as global coordinators." The offering is to be made in Canada and internationally because the domestic market is not thought to be large enough to allow for complete privatization of the Crown corporation in one shot.

The timing of the share issue, share price, and the size of the offering will be decided after the underwriters have given their advice to the government. Young is especially interested in moving all the CN shares at once in light of the trouble the previous Conservative government had in selling Air Canada. That privatization was handled with numerous share issuances, and the last one wound up being a financial loser.

* The conditions. Among the firm details of the sale of CN are:

--No restrictions on foreign ownership, but no investor may own more than 15% of the shares.

--CN must remain headquartered in Montreal.

--CN will be subject to the Official Language Act, which makes it a bilingual corporation, as if it were still a government agency.

--Residual real estate holdings and assets will be held back by the government for future disposal and CN will be paid "fair consideration" for the real estate.

Although the Liberals opposed the massive privatization measures of their Conservative predecessors, they are now fully committed to continuing the process. Young described CN as "the mother of Crown corporations" and reiterated his oft-stated policy of getting the government out of the railway business and all transport subsidy programs.

Said Young, "The status quo is non-sustainable. I think Canadians are aware of the fact instinctively that massive restructuring is going on in the rail industry. CN is certainly no longer part of the national dream."

After tabling the privatization legislation on May 5, Young then announced a "massive regulatory reform" of Canada's railways, expected to be tabled in June. The date for the presentation of this legislation is timed to follow the end of the mediation/arbitration process that was undertaken to end a strike which snarled Canada's rail system in March.

The reforms are expected to kill the National Transportation Agency and establish a more relaxed 240-day maximum abandonment process. Transport Canada, a government ministry, would assume some of the residual responsibilities from the NTA; the Bureau of Competition Policy would protect against anti-competitive actions.

* The doubters. While CN President Tellier welcomed the move, others were not as positive. CP Rail President Rob Ritchie is concerned that the government not bail out the bulk of CN's long term debt, which currently stands at $2.5 billion. However, CN has said that even the estimated $500 million it will receive from the government for the real estate holdings would still fail to take into account debt it accrued under government orders and not in the line of its own business activities, which have not been funded by government since a recapitalization in 1976. As an example, CN cited the $700 million in debt attributable to operating the now-abandoned Newfoundland Railway.

But, says Ritchie, "We would start to get a little anxious if any more than $200 million of CN debt is forgiven."

Ritchie pointed out that neither railway is viable in eastern Canada now, with the two companies losing $2 billion on those operations between 1988 and 1993. Last year, CN/SP merger plans in the East fell apart and the government later rejected CP's offer to purchase CP's eastern system for $1.4 billion minus a substantial tax write-off.

Industry analysts are being cautious about the privatization plan. Many have said CN had better meet the high expectations the company raised in its 1994 annual report. Not only is debt elimination vital, but so is improved cash flow. Cash flow in 1994 was $295 million, but capital expenditures came to $574 million. CN attributed the gap to heavy outlays for the elimination of 11,000 jobs, and major projects such as the just-completed St. Clair River Tunnel.

As was to be expected, the privatization of a company as historic and economically significant as CN has elicited some severe criticisms. New Democrat Member of Parliament Nelson Riis calls it "despicable. This is a hooker approach to government, where you sell yourself to the highest bidder and have no sense of your own integrity. They're beginning to make Brian Mulroney's Tories look very good."

Western provincial officials were not pleased with the news that CN headquarters must remain in Montreal. With the bulk of CN's business now in the West, the provinces have been pushing for a headquarters relocation to Winnipeg or Edmonton.