A US$1·48bn deal for the purchase of Dakota, Minnesota & Eastern Railroad Corp was announced by Canadian Pacific Railway on September 5.

The acquisition of the 4 000 km DM&E came as a surprise to many in the industry, and financial analysts immediately questioned the price as being high given the smaller railway's assets and earnings.

Bob Jankowitz, Senior Vice-President at Moody's Investors Service said 'CPR would be paying a premium for the DM&E at a time when the transportation market has likely already passed its peak.' Moody's place CPR's debt ratings under review for possible downgrade.

DM&E has been developing an ambitious scheme over the past five years to build a new railway into the coal-rich Powder River Basin in Wyoming utilising a combination of 451 km of new tracks and an upgrade to 965 km of the railway's existing right-of-way across the US upper-Midwest. This would compete with BNSF Railway and Union Pacific, which currently dominate the lucrative business of transporting of low-sulphur coal. US regulators approved the plan after DM&E agreed to numerous environmental, safety and operating restrictions, although opposition from communities along the route has continued.

However, the proposal was dependant on a US$2·3bn loan from the federal government, and this was rejected last February by the Federal Railroad Administration, which said it posed an excessive and unacceptable financial risk to taxpayers. CPR apparently believes the scheme still has merit because it has agreed to potentially pay approximately US$1bn more for DM&E; US$350m if construction begins on the Powder River project prior to December 31 2025 and about US$700m contingent on whether a specified volume of coal is shipped out of the basin over the new line prior to that date.

Meanwhile, CPR says it will spend US$300m to upgrade the DM&E's infrastructure over the next few years. 'The DM&E is an excellent fit for Canadian Pacific, making this a strategic end-to-end addition to our network,' said President & CEO Fred Green. 'The DM&E is a high-quality, growing regional railroad that complements our existing franchise. There are natural synergies between our two railroads which make this a very attractive transaction. We have a solid transition plan that I am confident we will implement successfully. We will work together to build on the significant improvements the DM&E has made in operating efficiency and safety over the past several years.'

The transaction is subject to review and approval by the Surface Transportation Board, a procedure which CPR believes will be completed in less than a year. If the deal goes through, DM&E will become part of CPR's US network.