By Theo van de Kletersteeg

On October 20, Canadian Pacific Railway announced that exploratory merger talks initiated with CSX Corporation had terminated, and that no further talks were planned. Thus ended, for the moment, speculation that CPR is looking for a U.S. partner. However, transportation of crude oil has become a rapidly growing business for both railways, and a merger between CPR and CSX would allow for more efficient transportation of Alberta, Saskatchewan and North Dakota oil to refineries in the eastern U.S. Although exploratory discussions ended, it seemed that the die had been cast, and it is reasonable to speculate that CEO Hunter Harrison’s team has its eyes set on expanding CP’s footprint, perhaps by acquiring CSX after all and, if not, then perhaps another railway. With the rail transportation industry performing well, and with plenty of potential for additional gains by increasing network efficiency, CP’s forays into re-organizing North America’s rail network might only have been the opening salvo.

Given the earlier moves and the mutual benefits that a CP-CSX tie-up could achieve, speculation to explain the high level of trading and the significant increase of the price of CSX stock during the week ended May 1 centered around the possibility that activist investor Bill Ackman, CEO of Pershing Square Capital Management LP had started to accumulate a position in CSX Corporation, for the purpose of seeking control. On the other hand, a CN-CSX tie-up might also make a lot of sense. While things are unclear at this time, we should not be surprised to see further consolidation in North American rail carriers in 2015. Canadian carriers have done superbly well doing the past few years, and must be considered to view current disruptions in some commodity markets as an opportunity to expand their strategic reach. Last, but certainly not least, the rivalries between CN and CP are a powerful factor to spur both carriers on to protect their strategic “flanks”, and both must be considered as being actively interested in urgently exploring the positive goal of making a major acquisition that is accretive to earnings and provides a platform for continued growth, as well denying their rival the opportunity to walk away with the crown jewels.