After reports that western railroad company Union Pacific Corp. is interested in buying eastern rail company Norfolk Southern Corp., some analysts are speculating the other major western railroad could be interested in merging with Jacksonville-based CSX Corp.
CSX and Norfolk Southern are the two major eastern U.S. railroads and Union Pacific and BNSF Railway are the two major western railroads.
After The Wall Street Journal reported the talks between Union Pacific and Norfolk Southern, Barron’s reported July 18 that BNSF could target CSX as a defensive maneuver.
BNSF is owned by Berkshire Hathaway Inc.
“Such a deal might be an elephant-sized transaction that Berkshire CEO Warren Buffett has sought for more than a decade that could absorb a chunk of Berkshire’s more than $300 billion in cash,” Barron’s said.
TD Cowen analyst Jason Seidl upgraded his rating on CSX from “hold” to “buy” July 21 on the increasing possibility of railroad industry consolidation.
“A UNP bid for Norfolk Southern likely results in a BN bid for CSX; announcement should be catalyst for shares despite regulatory hurdles,” Seidl said in his research report.
These railroads are four of the six large Class I freight railroads in North America with the other two - Canadian National Railway and Canadian Pacific Kansas City - headquartered in Canada.
A merger involving any of these companies would face heavy scrutiny from the U.S. Surface Transportation Board, the main regulatory agency covering the rail industry.
However, merger talk has increased this year on speculation President Donald Trump will appoint new STB board members who would be more amenable to a big merger.
“It is our view that UNP could have an inclination of who will fill the fifth STB board seat (currently a 2-2 split, and the risk of moving forward with a merger in a split is too high, in our view),” Seidl said.
He said Union Pacific “may have a nod from Washington (we don’t think UNP would hire bankers if they didn’t get some form of acknowledgment from Washington).”
The merger speculation intensified with a July 16 report from news site Semafor that Union Pacific was working with investment bankers at Morgan Stanley to make a bid for either CSX or Norfolk Southern. The Wall Street Journal reported the next day that Union Pacific was talking only to Norfolk Southern.
Seidl also said Union Pacific “sees significant revenue and cost synergies (that we conservatively estimate), which should drive better service and growth” in an acquisition of Norfolk Southern, which would help it get regulatory approval.
Seidl’s report came after TD Cowen hosted a call July 18 with Farrukh Bezar, former chief strategy officer at CSX.
“Our panelist thinks both BN and CSX may have been caught flat-footed and that it is unlikely BN will announce interest in the next week; they will likely observe and see how the process evolves,” Seidl said.
“We believe an offer (for CSX) would eventually come, though may come at a smaller premium to NSC/ UNP given they would be the later draft pick,” he said.
“We don’t expect the Canadian rails to get involved given there are fewer synergies to extract and zero political will to have a Canadian carrier own an Eastern carrier, in our view.”
CSX’s stock rose as much as $2.36 over two days to $35.62 July 18 after the initial reports about a possible merger.
Seidl set a $45 price target for the stock in his report.