By Nick Carey and Diane Bartz
CHICAGO (Reuters) - Shares of No. 3 U.S. railroad CSX (CSX.NY)Corp
According to the report in the Wall Street Journal late on Sunday, the No. 2 Canadian railroad made a bid last week for Jacksonville, Florida-based CSX, which rejected the offer. Both companies said they did not comment on market rumors.
Shares in Canadian Pacific were not traded Monday as the markets in Canada were closed for a holiday.
In a client note, Cowen & Co analyst Jason Seidl wrote that Canadian Pacific could in theory team up with hedge fund Pershing Square Capital Management and take a bid directly to CSX shareholders.
Activist investor William Ackman, who runs Pershing Square, in 2012 had recruited Hunter Harrison, who had previously been chief executive officer of Canadian National Railway Co
But Seidl said any deal was unlikely in the near term since shippers and regulators were "disenchanted" with the rail industry because of its service and capacity problems.
Severe weather last winter wreaked havoc on the major railroads' networks, while the rise in oil-by-rail shipments has caused delays for grain shippers.
Harrison has indicated that mergers could be a way to alleviate network congestion and improve service.
Any merger would have to be approved by the U.S. Surface Transportation Board.
Seth Bloom, president of Washington-based Bloom Strategic Counsel and former general counsel of the U.S. Senate Antitrust Subcommittee, said the STB was "pretty tough," but might not find a deal anti-competitive since Canadian Pacific is not one of the four major U.S. railroads.
However, the Association of American Railroads industry lobby group considers both Canadian National and Canadian Pacific "Class I" railroads because of their extensive U.S. holdings.
In a note for clients, Credit Suisse analyst Allison Landry wrote that STB rules for mergers between Class I railroads had "an arguably impossible hurdle rate.
"Therefore, in our opinion, the deal is a non-starter."
Harrison was at Canadian National when it tried to merge with BNSF, which is now owned by investor Warren Buffett's Berkshire Hathaway Inc
Many companies have complained over the years about the prices railroads charge to haul freight. Analysts therefore expect shippers to oppose any merger on the grounds that it would drive up prices and reduce competition.
The other major railroads are also seen as being generally against 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)