Canadian Pacific, CSX Terminate Merger Talks

Railroad operator Canadian Pacific Railway (CP) has ended collaboration talks with peer CSX Corporation (CSX) and plans no further discussion on it. However, the companies have not commented on the matter.

The presence of six Class I railroad operators in the U.S. and Canada limits the scope for unification within operators in the industry as it will lessen competition. Also, in order to discourage monopolistic practices, the government may impose stricter regulatory laws.

We also believe that the new directives will pose significant difficulties for both Canadian Pacific Railway and CSX Corp. Moreover, there have been no mergers or acquisitions within the U.S. railroad industry over the last 15 years.

Furthermore, the U.S. railroads are subject to the jurisdiction of various regulatory agencies including the Surface Transportation Board (STB), the Federal Railroad Administration (FRA) and other state and federal regulatory agencies. Earlier, the Rail Safety Improvement Act of 2008 (RSIA) imposed limitations on employee work hours and may result in higher operating costs for the company down the road.

However, a merger between Canadian Pacific Railway and CSX Corporation would have created over 34,700 miles of track, thus improving efficiency by means of developing a single railroad which would deliver coal from mines to utility centers, with fewer stops.

Moreover, increased production of oil and other consumer goods has resulted in higher demand for improved railroad services. Hence, the consolidation would have significantly improved the service by delivering goods in a timely manner to respective vendors.

CSX currently holds a Zacks Rank #2 (Buy) while Canadian Pacific Railway carries a Zacks Rank #3 (Hold).

Stocks to Consider

Other transportation stocks that warrant a look include Kansas City Southern (KSU) and Norfolk Southern Corp. (NSC). Both carry a Zacks Rank #2 (Buy).