CP Seeks Rail Merger with CSX, Reports Say

This story appears in the Oct. 20 print edition of Transport Topics.

Canadian Pacific Railway Ltd. reportedly is pursuing CSX Corp. at a time when the U.S. regulators who would have to approve such a move are showing increasing frustration with today’s delay-plagued rail environment.

Several news services reported last week the proposed merger. The press reports, including The Wall Street Journal and Bloomberg News, were not corroborated at press time since both companies declined to comment.

Nor did CSX officials directly address the reports during a conference call with investors Oct. 15, a day after posting third-quarter results.

However, an opportunity could arise this week, when Canadian Pacific officials and CEO Hunter Harrison, a longtime advocate of rail mergers, speak with analysts about the quarterly results.

While speculation swirled about the first rail consolidation effort since 1999, the Surface Transportation Board this week is awaiting the first, more detailed service reports that the agency demanded earlier this month. Those reports, containing more train and individual shipment-delay information, were a response to complaints from grain, auto and other rail customers.

“There is a need for broader standardized-performance data from the railroad industry as it continues to address existing service challenges,” the agency’s Oct. 8 decision said. In addition, the board has pressed Canadian Pacific to provide more grain-shipping data after shipper claims that oil trains were getting priority over their agricultural freight.

STB toughened its central role as merger arbiter in 2001 after the 1999 proposal by Canadian National Railway and Burlington Northern Santa Fe met with protests from competitors and customers. Earlier in the 1990s, STB had to cope with fallout from post-merger service meltdowns across the industry.

Harrison played a central role in that 1999 proposal, as Canadian National’s chief operating officer at the time. He joined Canadian National when that carrier bought Illinois Central Railroad, where Harrison was CEO.

Harrison said earlier this month that he expected a new round of rail consolidation could begin in just two years.

Analysts speculated that delays would create major regulatory roadblocks to any deal.

“Now is not the ideal time for such an effort to be launched, in our opinion, primarily because both shippers and regulators are currently disenchanted with the rail industry,” said Jason Seidl, a Cowen and Co. analyst.

Seidl also said 70% of shippers oppose rail mergers, based on his third-quarter survey of rail customers released Oct. 9.

When asked about rail mergers during the conference call, Michael Ward, CEO at CSX, did say that he believed

“[STB] would be very cautious about this. That would be my speculation, but you’d probably better ask them.”

CSX posted record third-quarter net earnings of $509 million, or 51 cents per share, up from net earnings of $455 million, or 45 cents, in the same period last year. Revenue was $3.2 billion, an 8% increase from the same year-ago period.

Harrison’s primary motivation, FTR consultant Larry Gross told Transport Topics, is the opportunity to address persistent delays at Chicago, the nation’s largest rail junction and a place where Canadian Pacific and CSX tracks meet.

“His view, which I think is correct, is that until the rail industry solves problems in Chicago, the rest of the delays won’t be resolved,” Gross said.

Harrison wants to control a terminal railroad called the Indiana Harbor Belt, where rail freight from all railroads is exchanged between carriers, creating a vehicle to resolve service problems, Gross said. If Canadian Pacific and CSX combine, that would give the company control of ownership and operations of the Indiana Harbor Belt.

Another merger justification could be the ability to ship oil from Saskatchewan and North Dakota to East Coast refineries, several analysts said.

Truck-rail is a small factor in a potential linkup, Gross said. He cited the potential to create transcontinental intermodal service between Vancouver, British Columbia, and the U.S. East Coast, but noted limited benefits because there isn’t much existing business on that route.

Even if there was a combination, the combined intermodal revenue of the two railroads still trails industry leader BNSF Railway’s annual intermodal revenue of about $5 billion.

In total, Canadian Pacific and CSX have about $17 billion annually from all types of freight and about $5 billion in profit before interest and taxes. Both of those amounts are less than the annual results at Union Pacific and BNSF.

Some analysts believe a linkup of Canadian Pacific and CSX would spur another round of acquisitions.

“We’re ready for a reformation of the industry to the next level,” Avondale Partners analyst Donald Broughton said.

Seidl speculated that Canadian Pacific and Pershing Square Capital, an activist investor, could pursue a deal by appealing directly to CSX shareholders if that company rebuffed a bid. Pershing CEO William Ackman orchestrated the successful ouster of Canadian Pacific’s former management in 2011 and recruited Harrison to take over there.