Canadian Pacific (CP) Railway Ltd. said today that it has ended talks with U.S. eastern railroad CSX Corp. about a possible merger. No further talks are planned.
In the same statement that announced the end of the talks, CP said that rail industry stakeholders must take "immediate action" to curb network congestion, which is bound to get worse without any relief. CP CEO E. Hunter Harrison, considered by many to be the industry's top operator, will discuss the topic of railroad mergers and acquisitions and the need for a comprehensive North American transportation policy in a conference call tomorrow at 1 p.m. EDT, after CP releases its third-quarter results. The call is open to all interested parties.
Harrison has gone on record supporting rail mergers as a way to improve network fluidity and ease congestion at choke points across the continent.
"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 in the statement. The railroad warned that the industry's current predicament "will only worsen over time if solutions aren't put in place immediately."
CP did not comment in the statement on why merger talks ended. In fact, neither railroad acknowledged the existence of discussions when it was first reported last week. CSX had rebuffed CP's initial advances, according to those reports.
In addition, a CP-CSX combination, known in the rail business as an end-to-end merger because it involved little network overlap, could have faced severe regulatory opposition from U.S. and Canadian regulators. A merger of this type would have removed a major rail company from the scene, thus concentrating more traffic in the hands of fewer carriers. In addition, railroads have been struggling for almost 12 months to improve service levels, which have declined due to various factors, including the impact of the bad winter weather on their networks.
John G. Larkin, lead transportation analyst at investment firm Stifel, Nicolaus & Co., speculated that regulators may block a deal of this significance because a bogged-down network doesn't need the added stress associated with the "rapid-fire integration" model that is favored by Harrison.
In today's statement, CP confirmed that it "proposed an integrated coast-to-coast combination" that would have been pro-competitive and customer-friendly. CP also said that the merger would have alleviated congestion throughout the continent, especially at the key Chicago gateway, which is served by six of the seven North American Class I railroads (only Kansas City Southern Railway doesn't directly serve Chicago).
If CP had acquired CSX, CP would also have become the majority owner of the Indiana Harbor Belt Railway (IHB), one of the two connecting railroads in Chicago. CP now owns 49 percent of IHB, while CSX owns 25.5 percent. According to Larkin, CP has repeatedly offered to buy both IHB and the Belt Railway Company of Chicago, the other connecting railroad in Chicago. A network that included CSX and IHB would have given CP control of a route around Chicago, according to Larkin.
In 2008, Canadian National Inc. (CN), which Harrison led at the time, spent $300 million to buy the Elgin, Joliet and Eastern Railway Co. from U.S. Steel for $300 million, a move that created a bypass for CN around Chicago.
CP hinted that regulatory worries are to blame for deterring future railroad combinations. It added, though, "that given the right structure between the right players, and having thoughtful considerations and remedies to address shipper concerns, regulatory approvals are achievable." Implying that the CP-CSX deal contained enough benefits to pass muster in Washington and Ottawa, the railroad said "a pro-competition, customer-friendly, safety-focused railway combination is one such solution that could not be ignored on its merits by regulators."