Wall Street analyst: CSX and CP are the most likely merger partners NEWSWIRE

NEW YORK — Class I railroad mergers are unlikely to occur in 2019, but if two of the major systems were to combine the most likely pairing would be between CSX Transportation and Canadian Pacific, a Wall Street analyst wrote in a research note this week.

“We believe investor interest in [mergers and acquisitions] has resurfaced after reports that CSX’s corporate jet was recently flown to Calgary (where CP is headquartered) for the first time in several years,” Wolfe Research analyst Scott Group wrote. “In addition, activist hedge fund TCI is now the second largest shareholder of CP and a major holder of three other rails. Lastly, CP’s CEO Keith Creel spoke quite openly about his support for [mergers and acquisitions] at CP’s analyst day last month.”

Neither railroad would comment on the report.

But a railroad official pointed out that the CSX jet was in Calgary, Alberta, because CSX Executive Vice President Mark Wallace still has family in the area. Wallace was former CEO E. Hunter Harrison’s chief of staff at CN, CP, and CSX.

The Wolfe report cited factors that make mergers more likely, including having a Republican administration in the White House.

Independent analyst Anthony B. Hatch of ABH Consulting disagreed with the conclusions of the Wolfe report.

First, he says London-based TCI — or The Children’s Investment Fund — agitated for operational and financial improvement when it waged a proxy battle at CSX a decade ago. It did not urge CSX to seek a merger partner.

Second, while the Trump administration takes a more hands-off approach to regulation, Republicans are loathe to pick winners and losers in battles between corporate interests. Shippers, such as large chemical companies, would line up against any Class I railroad merger, Hatch says.

Third, Hatch says CP saw limited synergies from potential combinations with either CSX or Norfolk Southern, two railroads it approached from 2014 to 2016 when Harrison was at the helm in Calgary.

“The idea of CP starting this is far-fetched,” Hatch says, noting that CP’s previous efforts were all about bringing Harrison to a big U.S. railroad.

The Wolfe note did say that mergers would be unlikely to gain regulatory approval from the U.S. Surface Transportation Board and that tensions between the U.S. and Canada would make it difficult to win Canadian government approval for an American railroad to acquire CP.