Canadian Pacific Railway Limited (TSE:CP) (NYSE:CP) attempted to initiate a merger discussion with CSX Corporation (NYSE:CSX) over the past week, according to Wall Street Journal based on information from people familiar with the matter.

Canadian Pacific Railway Limited (TSE:CP) (NYSE:CP) is the second-largest railway company by revenue in Canada. The company generated $5.5 billion in revenue last year. It has a market capitalization of $32 billion.

Canadian Pacific Attempted Merger Talks with CSX Corporation

Activist investor Bill Ackman fought to turnaround Canadian Pacific Railway Limited (TSE:CP) (NYSE:CP) in 2012.

CSX Corporation (NYSE:CSX) is the third-largest railroad operator in the United States with a market capitalization of $32 billion.

Canadian Pacific’s offer rejected by CSX

The report indicated that CSX Corporation (NYSE:CSX) rejected the offer of Canadian Pacific Railway Limited (TSE:CP) (NYSE:CP) to combine the railroad operators.

Combining the two railroad operators would create a leader in the industry with a market capitalization of around $64 billion. It is unclear whether Canadian Pacific Railway Limited (TSE:CP) (NYSE:CP) will continue to pursue the potential merger.

Obtaining regulatory approval would be tough

Railroad industry observers said the move of Canadian Pacific Railway Limited (TSE:CP) (NYSE:CP) to combine its business operations with CSX Corporation (NYSE:CSX) was bold.

According to them, Canadian Pacific would face tough obstacles in obtaining regulatory if it decides to pursue a merger with CSX. The U.S. Surface Transportation Board has a history of intervening mergers and acquisitions (M&A) in the railroad industry. In 2000, the board rejected the proposed merger between Burlington Northern and Canadian National Railway Company (TSE:CNR) (NYSE:CNI).

Railroad operators are benefiting from North American energy boom

The energy industry in North America is flourishing, and a transformation in the railroad industry is expected. Industry observers emphasized that railroad operators are the primary beneficiary of the booming energy sector in the region. Rails are very important in moving the abundant oil in the region.

Railroads in the region are hauling millions of barrels of crude oil. Fifty percent (50%) of major railroad operators in the United States generated $2.15 billion from hauling crude last year compared with $25.8 million in 2008.

A merger between Canadian Pacific Railway Limited (TSE:CP) (NYSE:CP) and CSX Corporation (NYSE:CSX) could increase its ability to take advantage on the energy boom in the North America. CSX operated rails from Midwest refineries on the U.S. East Coast, but it has no access to the North Dakota oil fields. On the other hand, Canadian Pacific has access to the oil-loading terminals in North Dakota.

Combining the railroad operations of Canada Pacific and CSX would create single-railroad operator with the ability to haul crude from oilfields down to the fuel refineries in the Northeast.