FAQ: CP-CSX merger talk (updated)

Photo by Bruce Stahl

Trains is pursuing the story on numerous fronts. While those articles develop, here are some frequently asked questions about a potential CP-CSX merger. We will continue to update this article as information becomes available. nd let us know what else you’d like to know about the possibility of a CP-CSX deal.

Why would CP want to pursue this merger? What are the benefits? And why might CSX want to be involved, despite their reported rejection of the initial overtures?

Initial reports of the potential deal, in the Wall Street Journal and Canada’s Globe and Mail, focused on the benefits for the booming crude-by-rail market for both parties. CP has access to North Dakota’s Bakken oil field, and could move 200,00 carloads of crude this year, while CSX serves East Coast refineries not reached by CP. A merger would create single-carrier service, with the potential to ease the interchange problems in Chicago —in part because the new company would become the majority stockholder in the Indiana Harbor Belt. CP, CSX and Norfolk Southern currently share IHB ownership, with no railroad holding a controlling interest.

There are also the general benefits that come with a point-to-point merger — one capable of providing coast-to-coast delivery for traffic such as bridge intermodal moves.

If CSX has said no, as has been reported, does that kill the merger?

Not necessarily. CSX’s initial rejection of merger overtures could simply be the first move in the negotiation process.

Also, in a Wall Street Journal blog post on Monday, reporter Liz Hoffman wrote that CSX could be vulnerable to a takeover if CP pursues the deal. Because CSX’s directors are elected annually, and investors owning just 15 percent of stock shares can force a special election — “an unusually low bar,” in Hoffman’s words — it could be possible to change the makeup of the current board, which reportedly is not interested in a deal.

How is a CP-CSX deal viewed in the financial world?

CSX stock was up as much as 13 percent on Monday (as of 2 p.m. CDT, it was up 7.8 percent). CP stock had been up as much as 5.6 percent but at 2 p.m. was down 0.5 percent in the U.S. (CP stock did not trade in Canada on Monday as the nation observed its Thanksgiving Day.)

But analysts are highly skeptical. Reuters reported Monday that Cowen & Company analyst Jason Seidel wrote in a note to clients that a deal was unlikely because of likely opposition from shippers and regulators “disenchanted” with the current state of the rail industry, given service and capacity issues.

Reuters also reported that Credit Suisse analyst Allison Landry had called the deal “a non-starter” because the Surface Transportation Board, which must approve a merger, has “an arguably impossible hurdle rate.” The news agency also quoted independent analyst Anthony Hatch who wrote, “the risks — economic, operational and, enormously, political (especially now) outweigh the benefits.”

Where would the new company be headquartered?

CP is based in Calgary, Alberta, having relocated there from Montreal in 1996. CSX is based in Jacksonville, Fla., having moved its headquarters from Richmond, Va., in 2003. A headquarters in Canada seems likely, given the tax advantages; a recent Yahoo! Finance article noted that the combined tax rate (federal, state and local) for U.S. companies can be as high as 40 percent, while the combined tax rate in Canada tops out at 26.5 percent.

What are the regulatory hurdles? Who would have to approve the merger?

While other agencies on both sides of the border would certainly be involved, the U.S. Surface Transportation Board clearly provides the primary hurdle. (Canadian barriers would become more significant if a U.S. company attempted to take over a Canadian one, but the Canadian government is generally considered business friendly. Even Canadian media reports on the possible CP-CSX deal have focused on the U.S. regulatory issues.)

The STB set a high bar in 2001 when it issued merger rules after a 15-month moratorium that effectively killed a proposed BNSF-Canadian National merger. In the overview to the 304-page document issued on June 7, 2001, the agency wrote:
“Our revised rules reflect a significant change in the way in which we will apply the statutory public interest test to any major rail merger application. Because of the small number of remaining Class I railroads, the fact that rail mergers are no longer needed to address significant excess capacity in the rail industry, and the transitional service problems that have accompanied recent rail mergers, we believe that future merger applications should bear a heavier burden to show that a major rail combination is consistent with the public interest. Our shift in policy places greater emphasis in the public interest assessment on enhancing competition while ensuring a stable and balanced rail transportation system.”

The rules also indicated an intention to ensure competition — “ Such competitive enhancements could include, but would not be limited to, reciprocal switching arrangements, trackage rights, or elimination of “paper barriers” on interchange by shortline carriers” — and to take into account “potential future responsive mergers, and issues related to mergers of U.S. and foreign carriers.”