Citi Think Canadian Pacific Is Giving Shareholders A Chance To Weigh In On Merger Idea

• Canadian Pacific Railway Limited (USA) CP shares have lost 27 percent year-to-date, declining steadily after hitting a high of $197.47 on August 24.
• Citi’s Christian Wetherbee maintained a Buy rating on the company, with a price target of $170.
• The company is reportedly in merger talks with Norfolk Southern Corp. NSC, whose shareholders may now be more demanding, Wetherbee mentioned.

Bloomberg reported on Monday that Canadian Pacific was in talks with Norfolk Southern and that the former company was in the initial stages of sourcing capital.

Analyst Christian Wetherbee said that the companies may not be close to a deal. Instead, it seems more probable that Canadian Pacific’s management team is “inviting shareholders to weigh in.”

The company was taken by surprise last year, when shareholders did not really press CSX Corporation’s CSX management and board to pursue merger talks.

Wetherbee believes that Canadian Pacific may be “floating the idea again” based on the fact that, following a tough year for rail stocks, “shareholders (of either NS or CSX) will be more demanding.”

A year back, when Canadian Pacific approached CSX, the rails were struggling with service. In 2015, however, volumes have been lighter, with industry carloads down 1.7 percent year-to-date, “potentially making integration of a large merger easier,” the analyst commented.

Moreover, volume and revenue prospects are not very bright over the next several quarters, and a major rail combination could prove to be a solid positive catalyst for stocks that have underperformed, Wetherbee added.

In the report Citi noted, “CP is really trying to lure investors to push NS, we think CSX could also be a target and if NS and CP ultimately agree to a deal, CSX would be the obvious choice for western rails or CN to acquire. CSX could also benefit from potential regulatory concessions if a deal was agreed to.”