Union Pacific (UP) is in early-stage discussions to acquire Norfolk Southern (NS), “according to people familiar with the matter,” The Wall Street Journal reported July 17.
“[T]here are no guarantees they will result in any deal or receive regulatory signoff, the people said,” according to the WSJ, which noted that another “suitor” could come forward.
UP, with 32,693 route-miles in 23 states, has a market value of roughly $140 billion, the WSJ said; NS, with 19,500-plus route-miles across 22 states, has a value of approximately $60 billion. A merger would create the largest U.S. Class I from coast to coast (download maps below).
UP told Railway Age that it “does not comment on rumor and speculation.” NS did not immediately respond to a request for comment.
According to the WSJ, UP CEO Jim Vena “has spoken publicly in recent months about the benefits of a transcontinental railroad” improving service and “smooth[ing] out current delays at interchanges.”
As the WSJ noted, a UP-NS combination would be scrutinized by not only the Surface Transportation Board—which adopted more stringent merger rules in 2001 requiring merging railroads to provide pro-competitive evidence in their application and demonstrate possible impacts from so-called “downstream effects”—but also the U.S. Department of Justice, unions, Amtrak and investors.
The 2023 Canadian Pacific-Kansas City Southern merger, which created the first single-line, transnational railway connecting Canada, the U.S., and Mexico, was considered under the pre-2001 merger rules, due to a waiver applying to KCS.
The WSJ story follows one by Semafor, which on July 16 reported that UP was “working with investment bankers at Morgan Stanley to explore an acquisition of a rival,” also citing people familiar with the matter. The railroad and bank declined comment to the media outlet. (Editor’s Comment: Neither NS nor CSX is a “rival” to Union Pacific. A UP merger with either one would be essentially an end-to-end combination, with very little overlap—much like CPKC. In any case, a source tells Railway Age, there has been “a lot of tire-kicking, testing the waters, whatever you want to call it” recently. – William C. Vantuono)
TD Cowen in June hosted a call with former STB Chair Daniel R. Elliott III to discuss rail M&A.
“Elliott sees a 20%-25% likelihood of a transcontinental merger—where there was negligible chance under the Biden Administration—in line with our view,” reported TD Cowen analysts Jason Seidl, Elliot Alper and Uday Khanapurkar. “Only a U.S. East-West/end-to-end combo is truly in play given 1) lack of overlap, and 2) geopolitical complications involved with a Canada-U.S. merger.”
“Competition will be the STB’s main sticking point, but the railroads could accept open access to alleviate concerns,” the analysts said. “Elliott noted that in some cases open access/reciprocal switching in a consolidated landscape could be more beneficial than fragmentation without frictionless access. We view this comment as incrementally positive for a merger case’s prospects. Service considerations will prove less of a concern for a merger case, as CPKC’s track record has alleviated this.
“A fifth Republican STB Board seat will likely need to be filled before any railroads would make a move. Given the long Senate confirmation process, the STB will be lucky if it fills the seat before the end of the year, according to Elliott. The risk of moving forward with a merger in a current 2-2 split (Republicans Patrick Fuchs, Chair, and Michelle Schultz; Democrats Robert Primus and Karen Hedlund) is too high, given the likelihood that the two Democrat Board members would vote against any additional consolidation. Potential candidates remain unknown, but this is likely not a high priority for the Administration.
“Getting the Administration on board will be key to any merger being successful. The FRA has already taken a stance on two-person crews, signaling the Administration’s alignment with the labor unions. An end-to-end merger likely shouldn’t eliminate any jobs (aside from corporate/executives), though negotiations with the labor unions would likely need significant new benefits to get them on board. Getting the unions on board will be crucial to getting “blessing” from the White House.”
“The Canadian rails are unlikely to be involved in any final round of consolidation, but the creation of transcontinental U.S. carriers should not affect them very much because both run north-south through the U.S. and transcontinental mergers would be focused on capturing east-west ‘watershed’ traffic,” TD Cowen Canadian analysts Cherilyn Radbourne and Patrick Sullivan noted. “In the short-term, we could see CN and CPKC used as a source of funds, as investors position themselves more strongly in the eastern U.S. rails, based on the understanding that one transcontinental merger is unsustainable and would prompt a responsive deal between the remaining western and eastern carrier.”
