Why CSX Isn't The Only M&A Target In The Rail Space Right Now

If you think CSX Corporation CSX is the only possible M&A target, you could be mistaken. There might be other potential opportunities for investors, according to Loop Capital.

On Monday, Canadian Pacific Railway Limited (USA) CP filed its separation agreement with outgoing CEO Hunter Harrison, with an effective resignation date of January 31. Harrison forfeited C$118 million (US$88 million) in equity awards.

Competition Covenant

Importantly, the competition covenant excluded three Class I railroads: CSX, Norfolk Southern Corp. NSC and Kansas City Southern KSU.

Of Mergers And Acquisitions

Investors can safely rule out KSU given Harrison's well documented negative views on Mexico. That leaves CSX and Norfolk Southern on the table. Recent media reports are speculating at a hostile, or at least coercive, run at CSX in partnership with former Canadian Pacific board member and ex-Pershing Square activist Paul Hilal.

But, Norfolk Southern may also come in the M&A frame of things due to its exclusion in the competition clause. Also, it might be a backup plan for Harrison.

“This separation agreement largely confirms that, although the fact that Norfolk Southern is also excluded from the competition clause suggests it might be Plan B (if you're going to give up C$118 million dollars it's probably wise to have a backup plan.),” Loop Capital analyst Rick Paterson wrote in a note.

Harrison, Canadian Pacific's Separation Deal

Meanwhile, the key items in Canadian Pacific’s separation deal with Harrison are as follows:

• For a period of three years from January 31, Harrison is prohibited from hiring Canadian Pacific employees above the level of manager, except current chief of staff, Mark Wallace.
• Harrison cannot work for, or with, in a consulting capacity Canadian National Railway (USA) CNI, BNSF or Union Pacific Corporation UNP.
• Harrison may not participate in an acquisition of, or merger with, Canadian Pacific for the same three-year period.

Analyst Commentary

Paterson is not entirely ruling out the possibility of a CSX merger with Canadian Pacific, but only after three years when Harrison's operating model could bring CSX in sync with Canadian Pacific in all respects.

Paterson also noted there are only two rail executives in North America that are actually pro-merger: Harrison and Canadian Pacific’s Keith Creel.

“While CSX is obviously much bigger, more complex, and much more lean in terms of costs than these three, our guess is that three years is what the Harrison team thinks they'll need to complete the heavy lifting,” Paterson added.

At last check, shares of CSX were up 0.13 percent to $46.05.