Canadian Pacific Railway and CSX Merger Talks End

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Canadian Pacific Railway Limited (NYSE:CP) (TSE:CP) announced on Monday, October 20th that exploratory talks on a potential merger with CSX Corporation (NYSE:CSX). to form a transcontinental railroad have ended. CP Chief Executive Officer Hunter Harrison noted the company would be hosting a conference call tomorrow after the third-quarter earnings report to discuss possible mergers and acquisitions.

Canadian Pacific CEO Harrison not giving up on a merger deal

In suggesting a merger among railroads, Canadian Pacific Railway Limited (NYSE:CP) (TSE:CP) CEO Harrison is challenging the long-held view that it was pointless to even discuss another merger in the railroad because regulators would scuttle such a deal. U.S. railroad deregulation in 1980 began a process that has decreased the number of major U.S. carriers to four alongside the two major north-of-the-border players Canadian Pacific and Canadian National Railway Co.

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“He seems to think that if the right rails got together, this might address the regulatory concerns,” noted David Tyerman, an analyst at Canaccord Genuity Corp. in Toronto. “He’s not letting go and is hoping to advance the agenda.”

Canadian Pacific Railway Limited (NYSE:CP) (TSE:CP) is trying to put “the topic of consolidation at the forefront of industry and regulatory discussions, perhaps paving a way for future consolidation,” David Vernon, an analyst at Sanford C. Bernstein & Co. in New York, wrote in a letter to investors. “The fact that the industry is facing capacity limitations changes the nature of the regulatory debate in important ways, and raising this issue should help uncover what type of deal can eventually be deemed acceptable by regulators,” he said.

CSX Corporation (NYSE:CSX) CEO Officer Michael Ward noted in a conference call October 15 that rail consolidation might lead to  disruptions in freight traffic, and federal regulators would likely be “very concerned” by the merger.

Only a few railroad companies remain today

Of note, the seven largest U.S. and Canadian railroads account for more than 90% of total rail revenue, whereas the top 10 trucking companies only represent 10% of that industry’s revenue, Ben Hartford, a Milwaukee-based analyst at Robert W. Baird & Co., noted a couple of weeks ago.

Canadian Pacific will likely “continue to look for ways to streamline its operations in Chicago, and that could mean the company goes after rail asset purchases that would be much less likely to face major regulatory hurdles,” Jason Seidl, a Cowen & Co. analyst in New York, highlighted in a Monday note to clients.

If other assets cannot be identified, Canadian Pacific Railway Limited (NYSE:CP) (TSE:CP) may renew its efforts to buy Belt Railway Co. of Chicago, which is owned by a group of Class I railroads, Seidl also noted.

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