PAR: Up For Sale – To Whom? – How Much? – Why Now?

Pan Am Systems Engages Bank of Montreal (BMO) to Find a Buyer for its Railroad Business. Many Bidders Expected to Make Offers for All or Parts of the ~1700 Miles of Track and Related Assets Ranging from Mattawamkeag ME to Derby CT to Rotterdam Jct. NY.

Umpteen million Pan-Am sale rumors have circulated through the years, and several quietly contrived deals have only narrowly failed, but this is the first time that the “For Sale” sign has been put in the window.

28 June, Billerica MA – Pan Am Southern (PAS)/Patriot Corridor partner Norfolk Southern has often been touted as an imminent buyer. WATCO reportedly reached an agreement to purchase PAR several years ago, only for the prospect to whither away. Canadian Pacific’s primordial interest in (PAR’s formative lines) Boston & Maine (B&M) and Maine Central (MEC) has fed the rumor mill from time to time.

What’s changed?

It’s been a tough year for all of the region’s railroads, apart from the industry’s nationwide malaise. The northeastern network has been impacted by the CN strike, a wintery Spring, First Nations blockades, and the Covid-19 pandemic. Pan Am’s own special 2020 event was the partial cave-in of the Hoosac Tunnel. The bill for repairs and detours reportedly amounted to $10 – $20 million.

Speculation has also flown for years that PAR majority owner Timothy Mellon, 78 years-old (and perfectly spry by all accounts), has long been considering his exit from the Guilford/Pan Am adventure. His ferment may have turned recently, when the Washington Post reported on certain unpleasant ideas promulgated in Mellon’s 2015 self-published autobiography, panam.captain . (Lesson of Life: If you are the reclusive sort, don’t publish an autobiography.)

Perhaps, with so much of the region’s network already in play, this is just the moment Pan Am ownership has been waiting for to make their exit.


What’s it worth?

Between 1981 and 1984, Tim Mellon bought B&M, MEC and Delaware & Hudson (D&H) for a total of $40 million, forming the Guilford System {panam.captain}. Essentially, that was net liquidation value. Insiders have suggested Mellon promptly got the money back by selling rights to fiber-optic lines.

The recent $8.4 billion sale of Genesee & Wyoming was at a 40% market premium over G&W’s public market value at the time. In 2012, the core assets were acquired from RailAmerica for about $2.5 billion. At the closing of the Brookfield acquisition, G&W had over 15,000 miles, yielding a per-mile value of ~$560,000. At that rate, Pan-Am’s ~1700 miles would fetch $952 million.

In November, Canadian Pacific agreed to purchase the 481-mile Central Maine & Quebec railroad for a reported $135 million, equating to ~$281,000 per mile, half of the G&W price.

Establishing a given railroad’s value is a little more complicated, as it must rationalize the value of assets, and the value of an income stream. Because Pan-Am is privately held we do not know its profit, but Tim Mellon is reported to have said that the company has never lost money.

Railroads have a wide spectrum for valuation. At one end is the net liquidation value – the expected return on sale of the assets. The premium over that base is calculated on traffic volume, revenue, operating and maintenance performance, and track condition. The first one may raise Pan Am’s stock as its mainline traffic density is higher than most shortlines; the last one may hurt the valuation, as much of Pan Am’s track mileage is in mediocre condition. Other factors such as port access or the ability to save costs by combining operations will influence the valuation.

Two major kinks in valuing Pan Am are the Massachusetts state-owned track mileage, over which Pan Am has the rights to operate for free. Also the Pan Am Southern line, jointly owned with Norfolk Southern, is the very spine of the Pan Am System


Who are the real bidders?

(The following is based on exclusive information and educated speculation:)

Norfolk Southern logoNorfolk Southern

  • Has a long interest and partnership in Pan-Am Southern. But in a PSR world Pan-Am’s lower margin paper traffic and low density network are less attractive.
  • A well-placed NS source claims NS is not interested.
  • The company currently does not appear to have the financial or management resources to take on such a project.
  • BUT wouldn’t they have done it by now?

WATCO logoWATCO

  • Has demonstrated its interest in Pan Am during a near-miss acquisition.
  • Very familiar with PAR operations and management.
  • Has made quiet inroads into New England, handling switching at PAR Maine paper customers.
  • Has an ongoing relationship with NS.
  • Known as a quality operator, respected by customers and employees.
  • Loads lots of Western produce traffic; Pan Am runs adjacent to many Eastern grocery and food service warehouses.
  • Has particular expertise in developing trans-load operations, of which Pan-Am has few; potential new channel of business.

Canadian Pacific logoCanadian Pacific

  • Their public comments show interest in expanding.
  • They have free cash to make a purchase, and have just shown by their CMQ purchase a willingness to pay the current valuations.
  • They already connect with Pan-Am at both ends, Mechanicville NY and Mattawamkeag ME
  • Haulage Rights over Vermont Rail System provide additional links from Whitehall NY and Newport VT.
  • There isn’t much current CP – PAR interchange, though there has been historically, with both B&M (at Wells River) and MEC (at St. Johnsbury).
  • One could imagine autos, intermodal, grain, ethanol and containers from Port of Saint John NB flowing to Pan-Am points.
  • BUT would the STB approve a CP purchase of Pan-Am in light of the earlier purchase of CMQ? Irving would loose choice in routing to NS and CSX (although presumably CSX could provide that).

Canadian National logoCanadian National

  • Long track record of purchasing neighboring regionals.
  • Reportedly been visiting strategic PAR customers.
  • Has cash available.
  • Looking for port access in the east, and has stated an interest in acquiring more track and linking to additional population centers.
  • Naugatuck CT to Halifax NS would make a nice intermodal route.
  • BUT CN does not connect with Pan-Am at any point. Unless New ENECR and SL&A were purchased from G&W is addition, then Pan-Am improves the value of NECR and SL&A by feeding additional traffic, offering a shortcut to Worcester and adding access to the port of Portland ME.

CSX logoCSX

  • Runs a high-density parallel mainline in Massachusetts, and a cluster of southeast MA lines
  • Selkirk regional gateway
  • Outflank NS with superior service on both corners of the eastern seaboard
  • BUT would the transaction wouldn’t pass STB muster?

Brookfield Asset Management (G&W) logoBrookfield Asset Management (G&W)

  • Brookfield and G&W both have their own histories of strategic acquisitions.
  • PAR is a natural fit with G&W owned NECR, CSOR, P&W and StL&A. It would give Canada – Worcester traffic off the NECR a significant short cut.
  • Shop facilities at Worcester, Saint Albans, and Waterville could be combined.
  • There is plenty of money to fund an acquisition.
  • Brookfield, BMO, and CN are all members of a very small club in Montreal.
  • Would a PAR purchase be folded into G&W, or “loaned” to CN — or remain independent?
  • BUT would the STB allow a combination of PAR and NECR/CSOR/P&W/SL&A dominating New England? It would reduce competition in Southern Maine and the Connecticut River Valley (neither of which represents a lot of traffic).

Fortress Investment Group logoFortress Investment Group

  • Highly-regarded former CMQ management is coincidentally available for their next project (Maybe. Ryan Ratledge has relocated to Texas)
  • Pan-Am comes with property and passenger train opportunities that may be uniquely attractive to Fortress. Fortress has expertise developing property and implementing innovative ideas.
  • Fortress likes to buy properties they can fix up and increase value – Pan-Am can certainly use fixing up, BUT can its value go any higher?

New Brunswick & Maine logoNew Brunswick & Maine (J.D. Irving Ltd.)

  • Irving is expanding in Maine and New England. PAR lines would fit well with JDI paper and wood products Boston and New York markets.
  • Has expressed interest in expanding its rail business.
  • Not known for paying high prices.

Patriot Rail, International Rail Partners, R. J. Corman, OmniTrax

  • These shortline holding companies are in the market to expand and might pay high prices.

Split It Up?

drawing of the various cuts of beefPan-Am might well be worth more, and would attract a wider array of shoppers, if two or more buyers could just bid for the parts they want. Energetic local railroads might be able to digest some of the spur lines, which would benefit from shortline-style attention to customer service. The States of Maine, Massachusetts, Connecticut, and even New Hampshire might take the opportunity to secure certain lines in support of long-term transportation objectives. The STB might more readily indulge Class I mainline ambitions if it felt that spur lines wouldn’t be left to whither, or that a reliable in-yard switching contractor would handle the customer service.

Hail Mary?

Who’s to say that a western road isn’t looking at ways to reach across the continent? While PAR is port-poor, its grasp of inland New England might eventually coax/force a merger with an Albany – Chicago routier.

Editor’s note: ANRP will be covering the Pan Am sale in full detail through its conclusion.