October 20, 2014 / 12:12 PM / 3 years ago

UPDATE 2-Canadian Pacific Railway ends merger talks with CSX

(Adds details, analyst comments, updates share price)

By Euan Rocha

Oct 20 (Reuters) - Canadian Pacific Railway Ltd said on Monday that it had ended talks to buy CSX Corp and that the two companies planned no further discussions, sending shares of the No. 3 U.S. railroad operator down nearly 3 percent.

A source familiar with the matter told Reuters recently that the two railroads had held exploratory talks this month and that they were contemplating whether to take things further. Neither side had confirmed the talks, first reported by the Wall Street Journal a week ago.

CP said on Monday that it had proposed an integrated coast-to-coast combination that would have improved customer service, promoted competition, alleviated congestion and generated significant shareholder value.

Major North American railroads have been struggling to keep up with demand, with record crop harvests, growing oil-by-rail shipments and rising volumes of consumer goods moving by train. However, analysts had cautioned service problems could make the U.S. Surface Transportation Board, which regulates the industry, skeptical about approving any deal.

CP, the No. 2 Canadian railroad operator, did not disclose the reason for the termination of talks, but hinted strongly that regulatory concerns were a huge factor.

"While regulatory concerns appear to be a major deterrent for many railroads considering combinations, CP believes that given the right structure between the right players, and having thoughtful considerations and remedies to address shipper concerns, regulatory approvals are achievable," the company said in its statement.

CP said the industry's problems would only worsen without immediate solutions, such as a customer-friendly, safety-focused rail combination.

Officials at CSX were not immediately available for comment. Its shares were down 2.8 percent at $32.91 in midday trading on the New York Stock Exchange.

Wolfe Research analyst Scott Group said in a note to clients on Monday that he would not rule out the possibility that CP and CSX would resume discussions if shareholders begin to push for a deal. But he added that while major mergers in the sector are possible, they were unlikely to occur within the next five years, due to the current regulatory environment.

Group also said CP shareholders would benefit even if the company attempted a tie-up with another railway, such as Norfolk Southern Corp or Berkshire Hathaway subsidiary BNSF Railway Co.

CP Chief Executive Officer Hunter Harrison plans to discuss railroad mergers and the need for a comprehensive North American transportation policy in a special conference call on Tuesday. The company reports third-quarter results earlier that day.

Shares of CP were down 1.6 percent at $221.48 on the Toronto Stock Exchange. (Reporting by Euan Rocha in Toronto and Sneha Banerjee and Rohit T.K. in Bangalore; Editing by Simon Jennings and Lisa Von Ahn)

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