Union Pacific is seeking to buy Norfolk Southern in a deal valued at $85bn in a merger that could trigger the final wave of railroad mergers across the US.
The deal would create the first transcontinental railroad in the country worth more than $200bn, combining Union Pacific’s rail network in the west with Norfolk’s rails that snake across eastern states.
The railroads said the tie-up would streamline deliveries of raw materials and goods across the country.
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.
But if the deal is approved, the two remaining major American railroads – BNSF and CSX – will face tremendous pressure to merge so they can compete. The continent’s two other major railroads – Canadian National and CPKC – may also get involved.
Union Pacific is offering $20bn 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 was up nearly 2% at $231.03 in pre-market trading after the announcement while Norfolk Southern’s stock dipped more than 2% to $280.
Union Pacific chief executive officer, Jim Vena, who has been championing the potential benefits of a rail merger, said this deal could make it possible for lumber from the Pacific Northwest and plastics produced on the Gulf Coast and steel made in Pittsburgh to all reach their destinations more seamlessly.
“Railroads have been an integral part of building America since the Industrial Revolution, and this transaction is the next step in advancing the industry,” Vena said.
The merged railroads would have an advantage over the other US railroads because they won’t have to hand off shipments in the middle of the country any more, enabling them to make deliveries more quickly and likely at a lower rate.
Past rail mergers have also triggered additional consolidation in the industry. There used to be more than 30 major freight railroads in the early 1980s. But the industry has consolidated down to six major railroads that handle the majority of shipments nationwide.
If BNSF is forced into the role of the acquirer, it will have resources to work with because Warren Buffett is sitting on more than $348bn cash at Berkshire Hathaway that owns the railroad, and he could be interested in completing one last major deal before he gives up his CEO title at the end of the year.
Buffett recently threw cool water on reports that he had enlisted Goldman Sachs to advise him on a potential rail deal in an interview with CNBC – but, given that he rarely uses investment bankers, that doesn’t mean that he and his successor, Greg Abel, aren’t considering the options. After all, Buffett reached the agreement to buy the rest of BNSF for $26.3bn in a private meeting with the CEO in 2009.
But there’s widespread debate over whether a major rail merger would be approved by the Surface Transportation Board (STB), which has established a high bar for consolidation in the crucial industry.
That’s largely because of the aftermath of an industry consolidation nearly 30 years ago that involved Union Pacific. Union Pacific merged with Southern Pacific in 1996, and the tie-up led to an extended period of snarled traffic on US rails. Three years later, Conrail was divvied up by Norfolk Southern and CSX, which led to more backups on rails in the east.
However, 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 $31bn to create the CPKC railroad.
But there were some unique factors in that CPKC deal that combined the two smallest major freight railroads. The combined railroad, regulators reasoned, would benefit trade across North America.
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.
