CINCINNATI — Norfolk Southern initially offered little more than half of the current price of $1.2 billion for its proposed purchase of the municipally owned Cincinnati Southern Railway — and the prospect of arbitration ultimately pushed the Cincinnati Southern board to agree to the final figure, WVXU Radio reports.
NS and the City of Cincinnati announced in November that they had reached agreement on the sale of the line, which NS and its predecessors had operated through subsidiary Cincinnati, New Orleans & Texas Pacific since 1881 [see “Norfolk Southern to buy CNO&TP line …,” Trains News Wire, Nov. 21, 2022].
The National Public Radio station, in a report based on newly released documents, says that negotiations for the route between Cincinnati and Chattanooga, Tenn., began in December 2020 with Cincinnati Southern’s board of trustees seeking to increase the annual rent from NS from about $25 million to $65 million per year. NS responded by seeking to buy the line, with an initial offer of $865 million, which the Cincinnati Southern board termed “grossly inadequate.”
Efforts to determine the line’s worth led to valuations ranging from $616 million to $2.46 billion. The back and forth of negotiations led to an NS offer in April 2022 of $1.55 billion, plus an additional $50 million depending on the speed in which the deal was finalized, or a lease of $37.3 million. Essentially, that ended up being the offer accepted — largely because of a clause in the existing lease that called for arbitration if no deal was reached by June 30, 2022.
“That arbitration clause introduces so much risk and uncertainty,” Cincinnati Mayor Aftab Pureval told WVXU. “Because the arbitrator could choose any one of these valuations, irrespective of our opinion.”
Completion of the sale now is contingent on a change in state law that would allow the revenue to be set aside for city infrastructure projects, and approval by Cincinnati voters. The legislature is expected to consider the matter this year, which would allow it to go to the voters in November.
So instead of getting a recurring revenue stream, Cincy gets a one time payment that, after politicians get thier grubby hands on it, will be gone in no time. Yeah, sounds like a good deal to me. Good grief.
The cost of the improvements does have an impact on these negotiations.
Who hasn’t deducted the cost of repairs (for things not your fault) from the rent check? I do not recall Southern getting a reduction on the lease payments for those major projects. I think they were able to fund most of it from operational savings.
What Southern paid for improvements to the line really isn’t a factor. I based my thoughts on the North Carolina Railroad. The state owns the line from Goldsboro to Charlotte, NC, and is leased by NS. Although the state does reinvest money into the line, so does NS. A few years ago the lease came up for renewal and NS said the state could accept it’s offer or NS would no longer lease the line. Not a good bluff as NS doesn’t really have a viable alternative. The state held firm.
If the City owns the property, they would have been the ones who created the Lease, and they would have put the arbitration clause in the Lease, and it is critical wherther the Lease states if the Arbitrators decision is binding or not. With that said, most arbitration clauses refer to arbitration as established by the American Arbitration Association, and those rules call for both sides to pick an Arbitrator from a list of arbitrators who are registered with the AAA. Both sides continue reviewing lists until they agree on an Arbiutrator, at which time both sides submit their evidence and wait for the Arbitrators decision. If the Lease does not call for binding arbitration, the matter then goes to the courts. The bottom line is this, if the City doesn’t like arbitration, they shouldn’t have agreed to have it in the Lease!
Andy S:
If you can get around the NYT paywall, this is a good place to start from the Dealbook in the business section:
Arbitration Everywhere, Stacking the Deck of Justice
https://www.nytimes.com/2015/11/01/business/dealbook/arbitration-everywhere-stacking-the-deck-of-justice.html
Arbitrators are selected and ones that might favor Cincinnati, small businesses or consumers won’t get business from powerful corporations.
Professional sports use arbitrators but the players have power and resources that compare well to the owners.
If Southern Railway paid for the rebuild so what? They got the advantage of it, didn’t they? They are big boys, so to speak, so they should have invested with the ownership issue in mind. If they didn’t, they did not think things through in a business way.
Modernization of what was literally the Rathole was paid for by the Southern Railroad
Arbitration is a widely used method to strip people or organizations from the ability to have an issue settled in a court with a trial by jury. The majority of persons employed by corporations are compelled to sign an arbitration clause. When you purchase an airline ticket or use a credit card you are legally bound to use arbitration. Needless to say, it strips one of legal rights and aggrieved parties alway come out on the short end.
Whomever put the arbitration clause in the lease knew exactly what they were doing. Anyone in government that agreed to it was incredibly foolish.
Gregg: Isn’t the issue more related to who gets to choose the arbitrator and not the arbitration itself? I’m admittedly no expert – my understanding of arbitration comes from the Major League Baseball arbitration cases which have been in the news. In that example, when the two sides are unable to negotiate a settlement, each states their case and what they feel a ‘fair’ amount would be. The arbitrator then picks one or the other. If the hypothetical arbitrator in the Cincinnati case were impartial, and the amount Cincinnati put on the table was realistic, why would they have any less chance of success than NS?
Does anyone reading these pages know who paid for the very expensive rebuild of this line over the years? If Southern Railway paid these costs, that was a huge investment into a line it operated but didn’t own.