Union Pacific is seeking 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 rail network in the West with Norfolk’s rails that snake across Eastern states.
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 that so many businesses rely on.
The railroads said the tie-up would streamline deliveries of raw materials and goods across the country. 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.
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 $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 rose slightly to $229.35 in premarket trading, while Norfolk Southern’s stock dipped more than 2% to $279.95.
Union Pacific CEO Jim Vena, who has been championing a merger, said the 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.
A combined Union Pacific and Norfolk would have an advantage because they won’t have to hand off shipments in the middle of the country anymore, enabling them to make deliveries more quickly and likely at a lower rate.
U.S. railroads have already gone through extensive consolidation. There were more than 30 major freight railroads in the early 1980s. Today, six major railroads that handle the majority of shipments nationwide.
Rival BNSF, owned by Berkshire Hathaway, has the war chest to pursue an acquisition of it chooses. CEO Warren Buffett is sitting on more than $348 billion cash and he may be interested in completing one last major deal before he gives up his role as chief exeucutive at the end of the year.
Last week Buffett 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 given that he rarely uses investment bankers that doesn’t mean that he and his successor, Greg Abel, aren’t considering their options. After all, Buffett reached the agreement to buy the rest of BNSF for $26.3 billion in a private meeting with the CEO in 2009.
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 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 U.S. 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 $31 billion to create the CPKC railroad.
There were some unique factors in that 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.
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.
