Skip to main content

In this March 21, 2014 picture, CSX hopper cars sit in a yard in Baltimore.

Patrick Semansky/AP

The news that Canadian Pacific Railway Ltd and CSX Corporation could be getting together – with a combined market capitalization of approx. $66-billion (U.S.) – is sending shockwaves through the rail industry. In a telephone interview Fadi Chamoun, analyst with BMO Nesbitt Burns Inc. said CP's overture towards CSX, and how to respond "is a discussion going on in the board room of every railroad right now."

There is much uncertainty over whether CP and CSX will ultimately do a deal. Firstly, CSX has reportedly rebuffed CP's approaches, which, as in dating, isn't a great start, but neither is it necessarily the end of the road. Secondly, regulatory approval from the Surface Transportation Board (STB) in the U.S. is far from certain. Mr. Chamoun says this hurdle is "pretty big," and would drag on for at least two years.

But if CP-CSX gets the regulatory nod, that could spur a new wave of deal making among the railway companies. Benoit Poirier, an analyst with Desjardins, wrote in a note that "we believe the acceptance of this transaction by authorities would likely create further M&As in the sector, as other railroads would then face a competitive disadvantage."

Story continues below advertisement

CP's competitors likely won't sit idly by if it attempts to gobble up CSX. Mr. Chamoun believes other bidders would emerge for CSX.

"A Union Pacific–CSX combination makes even more sense than a CP-CSX combination," he says. Union Pacific Corporation is a beast of a company, with a market cap just shy of $90-billion (U.S.). Mr. Chamoun argues that a union between Union Pacific and CSX would result in bigger cost savings than CP-CSX. "The freight density is much greater inside the U.S. than it is between Canada and the U.S."

And what about the prospect of a bidding war breaking out between CP and Union Pacific for CSX? It's "possible" says Chamoun. Don't count Burlington Northern Santa Fe Railway out of a possible takeover battle for CSX, either. While Burlington Northern "has its hands full trying to fix its own operations," Mr. Chamoun says, "if there are deals they would have to be thinking about getting involved. It would be very difficult for Burlington Northern to sit that out, as it will affect their business for the next 100 years."

Finally, Mr. Chamoun says Norfolk Southern Corporation, with a market cap of $32-billion (U.S.), could find itself being acquired by the likes of a CN or Union Pacific.

The Class 1 category is already a small club. There are seven Class 1 railroads in the U.S. The Association of American Railroads defines a Class 1 as a railroad with 2013 operating revenue of $467-million (U.S) or more. Two Canadian companies, CP and Canadian National Railway Corporation., fit this criteria. If the CP-CSX deal happens, the number of Class 1 railways in the U.S. could fall to six.

The message from the analyst community is, deals in an oligopolistic sector rarely happen in a vacuum. One major move from a Class 1 railroad could force the hand of a competitor. And if that happens, all bets are off.

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter
To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies