Canadian Pacific says exploratory merger talks with CSX ended without a deal

CALGARY – Canadian Pacific Railway Ltd. says talks with U.S. peer CSX Corp. have ended without a deal, putting a damper on the Calgary-based company’s hopes for an expanded North American rail network.

CP (TSX:CP) said Monday that no further talks are planned with CSX of Jacksonville, Fla. It did not say specifically why the “exploratory conversations” ceased or when they ended, but noted that regulatory concerns generally appeared to be a “major deterrent” to major railways joining forces.

“CP proposed an integrated coast-to-coast combination that would improve customer service, promote competition, alleviate congestion in North America — specifically the key Chicago gateway — and generate significant shareholder value,” CP said in a release.

“Such a business combination would offer creative alternatives for shippers, greater fluidity, increased capacity and improved efficiency industry-wide.”

CSX declined to comment on Monday. A report in the Wall Street Journal more than a week ago said CSX had rebuffed CP’s overtures.

CP’s network stretches from Vancouver to Montreal and the populous U.S. Northeast. Canadian Pacific also has an extensive network in the U.S. Midwest, including at the major rail hub through Chicago.

CSX’s system also reaches Chicago and traverses much of the eastern United States from Florida to the U.S. border with Ontario.

The combination would have created a US$62-billion railway capable of moving crude from North Dakota’s prolific oilfields to refineries on the U.S. Eastern Seaboard.

“The North American rail industry is confronted today with the challenges of moving more freight than ever and the prospect of moving even more as oil production, crop yields and consumer demand grow alongside the economy,” CP said.

“CP is convinced that the significant problems that beset the industry now will only worsen over time if solutions aren’t put in place immediately. A pro-competition, customer-friendly, safety-focused railway combination is one such solution that could not be ignored on its merits by regulators.”

CP chief executive Hunter Harrison is scheduled to expand on his views on North American transportation policy in a conference call with the financial community and media on Tuesday, when the company discusses its third-quarter results.

Analysts have said there would be plenty of benefits from this potential railway link-up for both railways. But they expressed doubts that such a deal could easily get the blessing of the U.S. Surface Transportation Board.

“There were some real compelling reasons as to why it would make sense, but I didn’t think it was ever going to get past the STB anyway,” said Jim Corridore, an analyst at S&P Capital IQ in New York.

CP and CSX have very little overlap between their networks. But with only six large, Class 1 railways in Canada and the United States, Corridore sees how having one less player in the mix could be problematic.

“Certainly, taking a competitor out of an industry that’s largely compressed already would have some pricing implications,” he said.

Nearly 15 years ago, Harrison’s former employer, Canadian National Railway Co. (TSX:CNR), attempted to merge with Burlington Northern Santa Fe, now owned by Warren Buffett’s firm. But the CN-BNSF deal was ultimately called off after U.S. regulators declared a 15-month moratorium on major railway mergers.

On its quarterly conference call last week, CSX did not address the CP talks specifically. But CEO Michael Ward said regulators would likely balk at approving mergers between the biggest North American railways because of concerns over service.

Shares in CP closed down nearly 1.5 per cent at $221.65 on the Toronto Stock Exchange on Monday. CSX shares were down about one per cent at US$33.51 on the New York Stock Exchange.

On the web:

Map of Canadian Pacific rail network

Map of CSX rail network

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