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By Nick Carey and Diane Bartz
CHICAGO, Oct 13 (Reuters) - Shares of No. 3 U.S. railroad CSX Corp rose nearly 10 percent on Monday following a report of a rebuffed takeover bid by Canadian Pacific Railway Ltd, but analysts said any such deal would face significant regulatory and other hurdles.
“You could make the argument that there is not much overlap between the two networks and between their businesses,” said Jim Corridore, head of industrials equity research at Standard & Poor‘s. “But they would face significant hurdles of getting a merger passed by the U.S. Surface Transportation Board (STB).”
Any merger would require STB approval.
The Wall Street Journal reported on Sunday that the No. 2 Canadian railroad made a bid last week for Jacksonville, Florida-based CSX, which rejected the offer. Both companies declined to comment..
CSX shares closed up $1.76 or nearly 6 percent at $31.70.
Shares of Canadian Pacific were not traded Monday in Canada as markets were closed for a holiday. They were up 1 percent in trade on the New York Stock Exchange. Elsewhere in the sector, Kansas City Southern shares were up 2 percent and Norfolk Southern Corp was trading up nearly 3 percent.
In a client note, Cowen & Co analyst Jason Seidl wrote that Canadian Pacific could theoretically team up with hedge fund Pershing Square Capital Management and go directly to CSX shareholders.
In 2012 activist investor William Ackman, who runs Pershing Square, recruited Hunter Harrison, who had previously been chief executive officer of Canadian National Railway Co, as CEO of Canadian Pacific.
Seidl said any near-term deal was unlikely since shippers and regulators were “disenchanted” with the rail industry because of service and capacity problems.
Harrison has indicated mergers could improve service. He has overseen an ongoing and widely-praised restructuring at the railroad.
“Canadian Pacific is going through a huge restructuring, so the timing of potentially taking on the complexities of a merger like this is puzzling,” S&P’s Corridore said.
Canadian National and Canadian Pacific “Class I” U.S. railroads because of their extensive U.S. holdings.
In client note, Credit Suisse analyst Allison Landry wrote that STB merger rules for Class I railroads had “an arguably impossible hurdle.”
“Therefore, in our opinion, the deal is a non-starter.”
Former STB chairman Charles Nottingham, now at law firm Husch Blackwell LLP, said any deal would be subject to a review potentially lasting up to four years.
Nottingham added that a merger would make CSX a stronger competitor to BNSF and No. 1 U.S. railroad Union Pacific Corp.
Analysts expect shippers to oppose any merger on the grounds that it could drive up prices and reduce competition.
“Shippers are generally opposed to any more consolidation in the railroad industry,” said Bob Szabo of Van Ness Feldman LLP who has represented shippers.
Most of the other major railroads are seen opposing any Class I mergers.
“We stand with the consensus here,” independent analyst Anthony Hatch wrote in a note. “The risks - economic, operational and, enormously, political (especially now) outweigh the benefits.”
But Cowen & Co analyst Seidl said: “If a merger does occur, others will likely follow.”
Reporting by Nick Carey; Editing by Lisa Von Ahn, Bernard Orr