On Monday Canadian Pacific Railway Ltd. reported it has ended exploratory talks with CSX Corp. regarding a possible merger, eliminating the option of forming a transcontinental railroad and dismissing plans for further discussions.
Canadian Pacific didnt give the exact reason why the company has given up on the merger, but strongly hinted that regulatory concerns were a huge factor.
“While regulatory concerns appear to be a major deterrent for many railroads considering combinations, 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,” the company said in its statement.
Hunter Harrison, CEO of the Canadian railway company, believed that a merger between to two can help the industry. However, his U.S. counterpart CEO Michael Ward said that such actions can only hurt them and make rail congestion even worse.
CEOs across the industry also criticized the idea, with one of them saying that a possible merger, after a year of disappointing results, can put the businesses under severe regulatory observation. Earlier this month U.S. regulators asked all major freight railroads to deliver detailed weekly performance data.
David Vernon, an analyst at Sanford C. Bernstein & Co, said in a note 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.”
On Tuesday Mr. Harrison scheduled a conference call regarding possible new deals, as the company made clear that it is open to other merger talks.
Scott Group, managing director and senior analyst at Wolfe Research, said in a report that he thought CPs intentions were more about gaining efficiency and expanding and less focused on a specific company. As the merger with CSX has failed, Canadas second largest railroad operator may look to acquire either Norfolk Southern Corp. or Berkshire Hathaway Inc.’s BNSF Railway Co. However, Mr. Scott wrote that such a consolidation is unlikely to happen in the near five years, mainly because of regulators.
Canadian Pacific Railway Ltd. fell 1.48% on Monday and closed at CAD 221.65, marking a one-year increase of 63.74%. The company is valued at CAD 38.00 billion. According to the Financial Times, the 27 analysts offering 12-month price targets for Canadian Pacific Railway Ltd. have a median target of CAD 245.00, with a high estimate of CAD 285.00 and a low estimate of CAD 84.00. The median estimate represents a 10.53% increase from the last price of CAD 221.65.
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