By Tim Krohn

Free Press Staff Writer

MANKATO — The recent announcement that Canadian Pacific Railway is buying the Dakota, Minnesota & Eastern Railroad was portrayed as a straight-forward purchase that might be approved quickly and would bolster the Canadian railroad’s reach in the United States.

But little is routine when it comes to the controversial DM&E.;

Today, approval of the deal is being delayed. The powerful Mayo Clinic is renewing its battle with the DM&E; over bringing coal trains through Rochester. Wall Street is speculating that there are ulterior motives for the purchase. And some Canadians may be showing a hint of bruised national pride.

In September, Calgary-based Canadian Pacific announced it would pay $1.4 billion for South Dakota-based DM&E.; The DM&E; spent a decade fighting for and receiving permission from the federal government to build a new and upgraded rail line from Wyoming to the Mississippi River to haul coal.

The upgraded line would go through Mankato and Rochester and bring up to 43 high-speed trains a day, up from two or three trains at slow speeds.

DM&E; wasn’t able to come up with the billions of dollars needed to build the line, but deep-pocketed Canadian Pacific says it hopes to see the DM&E; coal line project done after it purchases the railroad.

Canadian Pacific ran into its first snag two weeks ago when the United States Surface Transportation Board said it would not make a quick ruling on the proposed purchase.

Canadian Pacific and DM&E; had asked the STB to treat the sale as a “minor transaction” because of DM&E;’s small size and because, they said, the deal wouldn’t raise any significant anti-competition issues.

But the STB board ruled that there are enough questions about anticompetitive issues to treat the deal as a “significant transaction.” That means the CPR and DM&E; will be required to supply more information on everything from finances to environmental impacts. The STB expects to make a final decision late next year.

Financial analysts say they expect the deal will eventually be approved by the STB.

The Mayo factor

One of the groups that asked the STB to look more closely at the proposed sale was the Mayo Clinic in Rochester. Mayo has bitterly fought against DM&E;’s coal train plans because the current DM&E; tracks go through Rochester, near the world-renowned clinic.

Mayo has laid out every scenario of why sending mile-long coal trains through their city would be a bad idea. It argues rail vibrations could affect sensitive clinic and hospital equipment.

Mayo says trains could haul not just coal but dangerous toxic loads near the hospital, which could lead to catastrophic derailments.

It even suggests that because many world leaders come to Mayo for medical care, the trains could be used by terrorists to level some type of chemical or biological attack on the Mayo.

The Canadian view

The Toronto Globe and Mail seemed just a bit perturbed over the opposition from their neighbors to the south.

The newspaper carried a story headlined: “CPR v. the NIMBYs at Mayo Clinic.” The story said that Canadian Pacific “didn't count on a little-used stretch of track near the world famous Mayo Clinic to throw the deal off course...

“Hospital officials argue that William Worrall Mayo staked the ground first.

He founded his private medical practice in 1863 and the Winona & St. Peter Railroad Co.’s tracks finally reached Rochester in the fall of 1864. Mr. Mayo’s two sons joined the busy practice in the 1880s.”

Wall Street worries

Moody's Investors Service recently downgraded the debt ratings of CPR to “Baa3,” citing effects from the company's acquisition of the DM&E.;

“Baa3” is the lowest investment grade. A one-notch downgrade would take Canadian Pacific to junk status.

Moody's said the transaction has increased Canadian Pacific's debt by 30 percent to about $6 billion. It is expected the debt rating will improve if and when the sale is approved and finalized.

Analysts also believe Canadian Pacific ’s purchase of DM&E; may be an attempt to prevent a hostile takeover of the Canadian rail line.

Earlier this year, private equity firms Brookfield and Goldman Sachs were preparing a hostile takeover of Canadian Pacific, the second largest railway in Canada.

Reports said the equity firms would likely split off Canadian Pacific ’s real estate holdings and sell the rail operations to Union Pacific.

With Canadian Pacific now purchasing DM&E; and increasing its debt load, a hostile takeover is less likely.

The theory is that Canadian Pacific decided to look at long-term growth by taking on debt to expand its rail system into the lucrative coal-hauling business while at the same time making itself less attractive as a takeover target.

STB Review

Besides the Mayo Clinic, two other groups asked the Surface Transportation Board to take a more detailed look at the Canadian Pacific /DM&E; deal. The Iowa Northern Railway Company and the Iowa Department of Transportation said the merger could harm competition for the Iowa rail line.

The Canadian Pacific must now convince the STB that the acquisition improves competitiveness, creates new rail options where none currently exist and is a benefit for shippers.