Analysts dubious of railway merger deal between Canadian Pacific, CSX

CALGARY – Analysts say they’d be glad to see Canadian Pacific Railway Ltd. (TSX:CP) join forces with U.S. rival CSX Corp., but a number of hurdles stand in the way of a deal getting done.

A Wall Street Journal article over the weekend, citing anonymous sources, said Calgary-based CP made an overture to CSX last week, but had been rebuffed. A combination of the two railways could create a US$62-billion railway capable of moving crude from North Dakota’s prolific oilfields to refineries on the U.S. Eastern Seaboard.

Spokeswomen for both railways said they don’t comment on rumours.

Analysts said there would be plenty of benefits from this potential railway link-up, but they’re skeptical a deal will be done any time soon.

Desjardins analyst Benoit Poirier said he’d view such a deal “positively,” but “we remain concerned about the likelihood of completion given the reluctance of CSX’s management and the need for regulatory approvals in the short term.”

If authorities were to approve a CP-CSX merger, it would likely lead to other railways following suit in order to compete, he added.

Poirier said CP CEO Hunter Harrison could help improve efficiency at CSX, which lagged its peer group last year.

Harrison took the top job at CP in mid-2012 after Bill Ackman’s Pershing Square Capital Management successfully campaigned for a shakeup in CP’s management ranks.

Under Harrison, CP drove its operating ratio — the proportion of revenues used to operate the railway — down to 65 per cent this year, two years ahead of its 2016 target. Florida-based CSX’s operating ratio was 69.7 per cent in the third quarter.

“We note that a merger between CP and CSX would be beneficial for the crude-by-rail sector as it would create a single network that joins the Bakken region with the refineries on the U.S. east coast, and believe it would create a strong player in the intermodal business given the network would provide a unique route from British Columbia to Florida,” Poirier wrote in a research note.

Canaccord Genuity analyst David Tyerman said a note that a merger looks “quite speculative” right now, but would add “significant value” if it were to occur.

He also agreed CSX’s network could benefit from CP’s management team.

RBC Dominion Securities analyst Walter Spracklin said in a report Tuesday that it’s unlikely the U.S. Surface Transportation Board will give full support to mergers among the major North American railways. But to the extent such deals are allowed, he sees western and eastern railways pairing up.

While the most recent speculation is focused on a CP-CSX merger, Spracklin wrote in March that a different U.S. railway, Kansas City Southern, would be a good acquisition candidate for the Canadian company. It would be a “perfect fit” from a geographic perspective, he said at the time.

Canadian Pacific shares closed up 83 cents at $213.03 on the Toronto Stock Exchange on Tuesday. Canadian markets were closed on Monday for Thanksgiving.

In New York, CSX shares gained nearly six per cent on Monday. On Tuesday, the stock added another 2.9 per cent to close at US$32.61.

After markets closed on Tuesday, CSX posted third-quarter profit of $509 million, or 51 cents per share, up from $455 million, or 45 cents per share, in the same period a year earlier. Revenue grew by eight per cent to $3.2 billion.