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Investing.com-- Berkshire Hathaway’s pursuit of a CSX Corporation (NASDAQ:CSX) deal likely hinges on the success of a proposed transcontinental rail cooperative operating agreement between BNSF and CSX, TD Cowen said, with the famed Warren Buffett-led firm unlikely to make a bid unless the co-op disappoints.
The new arrangement, offering coast-to-coast freight service between the east and west, is seen as a competitive alternative to outright consolidation.
“Berkshire does not intend to purchase CSX, a move we thought was the likely outcome given the competitive offering of an East/West combination,” TD Cowen analysts said in a recent note.
The valuation and merger benefits “clearly [are] not appetizing to Berkshire” for now, they added. Berkshire would likely only step up its interest in acquiring CSX “if backed into a corner following UNP/NSC deal approval and co-op agreement disappoints.”
The outlook shifted after reports that Berkshire met with CSX management in Omaha earlier this month to clarify it would not pursue a bid. The co-op service launched between two major railroads aims to replicate the benefits of a continuous transcontinental-like network without tying up regulators with a full merger.
TD Cowen flagged key questions about regulatory hurdles with just one transcontinental merger currently on the table and the implications of a cooperative agreement versus outright consolidation. They asked whether the Surface Transportation Board (STB) will find two transcontinental mergers harder to approve and if Berkshire might be nudged toward a CSX bid should the approved UNP/NSC transaction make a larger impact.
With CSX shares sliding more than 10% over the past week on deal doubts, the risk to its stock hinges on whether the co-op agreement lives up to expectations or leaves room for further consolidation. Canadian Pacific’s statement, meanwhile, reiterating it will not participate added further doubt on the need for consolidation in the industry.
TD Cowen adjusted its valuation framework on CSX, cutting its price target on the stock to $38 from $45, reflecting the uncertain landscapewith key approval processes ahead.