Cash Market Moves

On July 24, the Union Pacific Railroad (UP) and Norfolk Southern Railway (NS) released a statement on their websites that the two companies were in talks to discuss a merger.

"Union Pacific Corporation (NYSE: UNP) and Norfolk Southern Corporation (NYSE: NSC) confirmed today that the companies are engaged in advanced discussions regarding a potential business combination. There can be no assurances as to whether an agreement for a transaction will be reached or as to the terms of any such transaction.

"Union Pacific and Norfolk Southern stated that they do not intend to make additional comments or provide an update on this matter unless and until they determine that disclosure is required or otherwise appropriate," said in the press release.

You may remember the most recent railroad merger of Canadian Pacific Railway (CP) and Kansas City Southern Railway (KCS) that was announced in March 2021, and finally was completed on March 23, 2023, when it was approved by the U.S. Surface Transportation Board (STB).

In other words, if the UP and NS continue negotiations and find a merger viable, it's not something that will happen overnight. Besides needing stockholders' approval, STB needs to review the finalized proposal as well. "In addition, the Department of Justice would most assuredly be involved in any acquisition discussions along with Members of Congress and other elected officials," said Mike Steenhoek, executive director of Soy Transportation Coalition, in an email to DTN.

Steenhoek added, "The prospect of future mergers among the two U.S.-based western railroads UP and BNSF and the two U.S. based eastern railroads, CSX and NS, is not new. Observers of the railroad industry have always wondered and made predictions when energy toward such mergers would commence. Here are some overall thoughts and comments regarding any future merger between eastern and western railroads:

-- History teaches that mergers and acquisitions within the railroad industry will inspire and motivate additional mergers and acquisitions. This is an important context to view the potential negotiations between Union Pacific and Norfolk Southern. If such an acquisition/merger were to occur, the energy and momentum toward the remaining two U.S.-based Class I railroads -- BNSF and CSX -- pursuing a merger would be considerable. This would ultimately result in two U.S.-based Class I railroads with coast-to-coast service. Many regulators, elected officials, labor unions, and railroad customers will regard this entire discussion as a "package deal" -- i.e. the approval of one merger/acquisition among two railroads will inevitably result in the merger/acquisition of the other two. This will cause considerable concern among many of the above constituent groups.

-- If these negotiations truly do proceed, it should be expected that another railroad will offer to acquire or merge with Norfolk Southern. This dynamic occurred when CP originally offered to acquire KCS a few years ago. This prompted CP's main competitor, Canadian National (CN), to submit their own offer to acquire KCS. Ultimately the CN offer was not allowed to proceed, and CP did acquire KCS in 2023.

-- Many agricultural and other railroad shippers will be concerned that further consolidation in the industry will result in diminished competition among railroads. This could result in increased rates and diminished service.

-- It is a fundamental reality within supply chains that handoffs, whether between modes of transportation or providers of transportation, frequently result in additional costs. Those who have long promoted consolidation between the eastern and western railroads have argued that eliminating these handoffs between one railroad and another will reduce costs and enhance marketing options for shippers. Proponents will argue that eastern shippers will have augmented access to western markets and ports. Similarly, western shippers will have increased access to eastern markets and ports."

Steenhoek added, "Given UP's market capitalization of $135 billion and NS's market capitalization of $63 billion, a merger of the two railroads would create an approximately $200 billion company that would provide service between the East to the West coasts of the United States."

Mary Kennedy can be reached at mary.kennedy@dtn.com

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