Union Pacific wants to buy Norfolk Southern in a $85 billion deal that would create the first transcontinental railroad in the U.S, and potentially trigger a final wave of rail mergers across the country.
The proposed merger, announced Tuesday, would marry Union Pacific’s vast rail network in the West with Norfolk’s rails that snake across 22 Eastern states, and the District of Columbia.
The nation was first linked by rail in 1869, when a golden railroad spike was driven in Utah to symbolize the connection of East and West Coasts. Yet no single entity has controlled that coast-to-coast passage.
The railroads argue a merger would streamline deliveries of raw materials and goods nationwide by eliminating delays when shipments are handed off between railroads. The AP first reported the merger talks earlier this month a week before the railroads confirmed the discussions last week.
Any deal would be closely scrutinized by antitrust regulators that have set a very high bar for railroad deals after previous consolidation in the industry led to massive backups and snarled traffic.
Pressure on remaining railroads
If the deal is approved, the two remaining major American railroads — BNSF and CSX — will face tremendous pressure to merge to create a second transcontinental railroad so they can compete. The continent’s two other major railroads — Canadian National and CPKC — may also get involved. The Canadian rails span all of that nation and feed into America. CPKC rails stretch south into Mexico
Some big shippers like chemical plants in the Gulf may be wary of the deal due to fears of a monopoly that could would wield immense influence over rates, but other major rail customers, like Amazon and UPS, may be in favor if it means packages will arrive more quickly and reliably. Those big companies, along with unions and communities across the country that the railroads cross, will have a chance to weigh before the U.S. Surface Transportation Board.
Consumers could benefit if the transcontinental rail does reduce shipping rates and delivery times. Union Pacific said that combined, the railroads would improve delivery times.
There’s speculation that this deal might win approval under the pro-business Trump administration, but the STB is currently evenly split between two Republicans and two Democrats. The board is led by a Republican, and Trump will appoint a fifth member before this deal will be considered.
Union Pacific is offering $20 billion cash and one share of its stock to complete the deal. Norfolk Southern shareholders would receive one UP share and $88.82 in cash for each one of their shares as part of the deal that values NS at roughly $320 per share. Norfolk Southern closed at just over $260 a share earlier this month before the first reports speculating about a deal.
Union Pacific’s stock fell nearly 2% to $224.98 in premarket trading, while Norfolk Southern’s stock dipped more than 3% to $277.40.
Union Pacific CEO Jim Vena, who has championed a merger, said lumber from the Pacific Northwest and plastics produced on the Gulf Coast and steel made in Pittsburgh will all reach their destinations more seamlessly.
“It builds upon President Abraham Lincoln’s vision of a transcontinental railroad from nearly 165 years ago, and will usher in a new era of American innovation,” Vena told investors Tuesday.
From 30 to 6
U.S. railroads have already undergone extensive consolidation. There were more than 30 major freight railroads in the early 1980s. Today, six major railroads handle the majority of shipments nationwide.
Western rival BNSF, owned by Berkshire Hathaway, has the war chest to pursue an acquisition of CSX, to the east, if it chooses. CEO Warren Buffett is sitting on more than $348 billion cash and the consummate dealmaker may want to swing for the fences one last time before stepping down as planned at the end of the year.
Buffett recently threw cold water on reports that he had enlisted Goldman Sachs to advise him on a potential rail deal in an interview with CNBC, but he rarely uses investment bankers anyway. Buffett reached an agreement to buy the parts of the BNSF railroad he didn’t already own for $26.3 billion after a private meeting with its CEO more than a decade ago.
Yet there’s widespread debate over whether a major rail merger would be approved by the Surface Transportation Board, which has established a high bar for consolidation in the crucial rail industry.
That’s largely due to the aftermath of a consolidation in the U.S nearly 30 years ago that involved Union Pacific. It merged with Southern Pacific in 1996 and the tie-up led to an extended period of snarled traffic on U.S. rails. Three years later, Conrail was divvied up by Norfolk Southern and CSX, which led to more backups in the East.
“We’re committed to making sure that doesn’t happen in this case,” said Norfolk CEO Mark George. He added that the railroads will spend the next two years planning for a smooth integration before this deal might get approved.
Just two years ago, the STB approved the first major rail merger in more than two decades. In that deal, which was supported by big shippers, Canadian Pacific acquired Kansas City Southern for $31 billion to create the CPKC railroad.
There were compelling factors in that deal, however, that combined the two smallest major freight railroads. The combined railroad, regulators reasoned, would benefit trade across North America. The deal announced Tuesday would merge the nation’s largest freight railroad, with the smallest.
Union Pacific and Norfolk Southern said they expect to submit their application for approval within the next six months and hope the deal would get approved by early 2027. They predict that they would be able to eliminate $1 billion in costs annually, but Vena said that every union worker at both railroads should still have a job. The railroads also predict they would be able to boost revenue by at least $1.75 billion each year by winning more business from trucking companies and other railroads.
On Tuesday, Norfolk Southern reported a $768 million second-quarter profit, or $3.41 per share, as volume grew 3%. That’s up from $737 million, or $3.25 per share, a year ago, but the results were affected by insurance payments from its 2023 East Palestine derailment and restructuring costs.
Without the one-time factors, Norfolk Southern made $3.29 per share, which was just below the $3.31 per share that analysts surveyed by FactSet Research predicted.
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