Gaining STB approval for proposed CP-CSX merger would be challenging, Baird says

Canadian Pacific has approached CSX Corp. with a proposal to merge, according to a Wall Street Journal (WSJ) report issued over the weekend.

The merged railroad would have a combined market value of about $62 billion and combined synergies to better exploit the North American energy boom, various rail industry analysts said after the WSJ issued the report. CSX's network covers the Midwest and East Coast, including numerous refineries, but doesn't directly access the Bakken Shale oil fields, while CP has access to North Dakota crude-by-rail terminals. A deal would potentially create a single railroad that could haul crude from North Dakota oil fields all the way to Northeastern refineries, analysts said.

However, CSX has rejected the proposed merger, according to the WSJ report. CSX and CP officials declined to comment on the report.

"CSX has a long-standing policy of not commenting on such rumors," said CSX spokesperson Melanie Cost in an email.

Adds CP spokesman Martin Cej in an email: "It is CP's longstanding policy to not comment on market rumors and speculation."

If a merger deal is on the table, gaining Surface Transportation Board (STB) approval for such a marriage would likely be difficult, said Robert W. Baird & Co. Inc. analysts in a special report.

Despite minimal network overlap between CP and CSX, a North American cross-border railroad combination proposed in 1999 by CN and BNSF Railway Co. — which similarly had little overlap — prompted the STB to declare a 15-month moratorium on large railroad mergers and draft new railroad merger guidelines. CN and BNSF consequently abandoned the deal, Baird analysts said.

"Those guidelines, along with recent congressional efforts to enact broader STB reforms to address recent rail service issues, likely make a combination of this magnitude challenging," they said.

In addition to the crude-transportation synergies, another primary motivating factor for the proposed CP-CSX merger is the congested Chicago rail hub, Baird analysts said. CP Chief Executive Officer E. Hunter Harrison purchased the Elgin, Joliet & Eastern Railway (EJ&E) while leading CN in 2007. The EJ&E provided a bypass to CN around Chicago, a major rail interchange point that has been particularly congested so far this year, contributing to service issues, Baird analysts said.