CP ends merger talks with CSX

Officials at the railroads are not planning any additional merger conversations.    Canadian Pacific has ended merger talks with CSX, and no additional talks are planned, the carrier said in a brief statement Monday.
   “While regulatory concerns appear to be a major deterrent for many railroads considering combinations,” it said in the statement, “CP believes that given the right structure between the right players, and having thoughtful considerations and remedies to address shipper concerns, regulatory approvals are achievable.”
   Jason Seidl of Cowen and Company predicted that CP shares on Monday would outperform expectations, and CSX shares would underperform. He implied, however, that the dissolution of merger talks may not have come out of the blue.
“It is hard to imagine that the regulators, who have been listening intently to shippers’ worries about rail service and pricing issues, would give their blessings on a deal that could exacerbate service challenges, at least in the near term, and further boost the railroads’ pricing power,” he wrote in a note to investors.
   The carrier noted that railroads are currently facing a number of significant capacity and service challenges, with an increase in oil and agricultural demand combined with a rise in general consumer freight. CP said a “pro-competition, customer-friendly, safety-focused railway combination” is one solution to the growing problems facing the rail industry.
   “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,” it said. “Such a business combination would offer creative alternatives for shippers, greater fluidity, increased capacity and improved efficiency industry-wide.”
   Seidl believes CP’s next steps include smaller rail asset acquisitions that would help its Chicago gateway without raising regulatory questions.
“CP has unsuccessfully attempted to acquire the Belt Railway Company of Chicago, which is jointly owned by six Class Is,” he wrote. “We would not be surprised if the company renewed its efforts to acquire the Belt if it cannot identify other assets.”
   Stifel Nicolaus’ John Larkin said, “We have maintained that the proposed deal would likely be beneficial to both of the two railroads involved, and could possibly benefit overall network fluidity, but that the necessary (and unlikely) regulatory approval made the deal improbable.”
   Using anonymous sourcing, the merger talks were previously reported by the Wall Street Journal. Almost immediately, Senator Amy Klobuchar, D-Minn., wrote the Surface Transportation Board to express hesitation at the prospect of a merger.
“Given recent concerns about shipping delays and ongoing concerns about anti-competitive conduct in the railroad industry, any further consolidation would prompt significant concern,” she wrote.
In the wake of the WSJ story, Seidl wrote in an investor note that the time might not be right for a merger because “both shippers and regulators are currently disenchanted with the rail industry due to the ongoing service and capacity issues, which emerged late last year and are unlikely to abate in any material sense until mid 2015, a timeline that some shippers may still view as wishful thinking.”
   He added that if the two carriers had linked up, it would only bring about more concern for shippers who are already worried about service levels. In Cowen and Company’s most recent quarterly rail survey, 70 percent of shipper respondents said they would oppose a Class I merger; that number is up 6 percent from the previous survey.
   Seidl had predicted that if CSX and CP merged, other carriers would begin looking at their own prospects and would start to seek potential partners. He singled out Norfolk Southern as the next potential merger target. He added that Canadian National, BNSF or Union Pacific might look into creating a transcontinental railway.
   Since 1980 Staggers Rail Act, the number of Class I railroads has fallen from 40 to seven. The last potential blockbuster merger could have occurred in 1999, when BNSF and Canadian National briefly considered joining forces to create North American Railways. Since then, the Surface Transportation Board has issued new guidelines on railway mergers.