Norfolk Southern, Union Pacific merger would form transcontinental railroad

Union Pacific announced an $85 billion deal Tuesday to purchase Atlanta-based Norfolk Southern, an agreement that, if approved by shareholders and regulators, would create a transcontinental railroad company, but cost Georgia a Fortune 500 headquarters.

Union Pacific CEO Jim Vena will be the top executive of the combined company, which will be called Union Pacific with headquarters in Omaha, Nebraska.

Atlanta “will remain a core location for the combined organization over the long-term with a focus on technology, operations, and innovation, among other priorities,” according to an announcement by the two companies.

The transaction could have massive consequences for the U.S. freight rail industry and the shippers that use it — as well as for Norfolk Southern’s Atlanta headquarters and its 3,000 employees. And with the deal subject to federal regulatory approval, executives were quick to push the benefits they see in it for the American public.

“Railroads are the backbone of the U.S. economy,” said Norfolk Southern CEO Mark George during an investor conference call Tuesday. “We power industries, connect communities and deliver the materials that build homes, grocery stores, factories and cities — you name it, and the railroad likely moved it.”

Executives touted the benefits of a transcontinental railroad to make cross-country transit one to two days faster by eliminating the need for interchanges — which they say will make rail more competitive, allow them to take market share from long-haul trucking and decrease highway congestion.

“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 in a written statement. “Imagine seamlessly hauling steel from Pittsburgh, Pennsylvania, to Colton, California, and moving tomato paste from Heron, California, to Fremont, Ohio. Lumber from the Pacific Northwest, plastics from the Gulf Coast, copper from Arizona and Utah, and soda ash from Wyoming.”

Deal could bring job cuts

George, who was in Omaha to announce the deal Tuesday, called it “a historic day for America.” Joining the two railroads “transforms the U.S. supply chain and transportation landscape,” he said, “making freight rail transportation a cost-effective option for more American shippers.”

George also said in a written statement that he’s confident Norfolk Southern and its employees “will contribute meaningfully to America’s first transcontinental railroad, and to igniting rail’s ability to deliver for the whole American economy today and into the future.”

But headquarters staff could see cuts as part of consolidation in the merger.

The companies expect to get $1 billion in “cost synergies,” including through reduced materials costs, increased efficiency and “rationalization of back office costs,” Union Pacific Chief Financial Officer Jennifer Hamann said during an investor call.

George said “all of our union employees who have a job today will have jobs tomorrow in our merged company.”

To Norfolk Southern’s nonunion employees, he wrote in a memo that “you will have opportunities to grow as part of a larger, combined enterprise, and we’ll be thoughtful and deliberate as we evaluate how best to integrate our teams and help you grow professionally.”

The Transportation Communications Union/International Association of Machinists represents Norfolk Southern and Union Pacific’s clerical workers, from accounting to payroll and customer service, including several hundred in Atlanta. The IAM’s rail division said it “will fight to protect our members’ jobs, rights and livelihoods.”

“History shows that less competition is not generally in the interest of workers or customers,” the union said in a written statement.

SMART Transportation Division, which represents workers at both railroads and is the largest rail union, said it “has every intention to oppose this merger when it comes before the Surface Transportation Board for approval,” criticizing Union Pacific for its labor practices and other decisions.

“SMART-TD urges all relevant regulatory bodies, elected officials, and stakeholders to conduct a rigorous, transparent, and labor-informed review of this proposed merger,” the union said in a written statement.

More consolidation to come?

Under terms announced by the two companies, Union Pacific will acquire Norfolk Southern in a stock and cash transaction reflecting a value of $320 per share for Norfolk Southern. Norfolk Southern shareholders would get one Union Pacific share and $88.82 in cash for each Norfolk Southern share they own.

On Tuesday, Norfolk Southern reported increases in second quarter revenue and income from railway operations, but adjusted its full-year revenue growth expectations from 3% to 2-3% because of a “dynamic economic environment.”

Three Norfolk Southern board members are expected to join Union Pacific’s board as part of the merger, including George and Norfolk Southern’s recently named board chair Richard Anderson — an experienced dealmaker who is also the former CEO of Atlanta-based Delta Air Lines.

Union Pacific has a market value more than double Norfolk Southern’s. Combined, the deal would create a company with a combined enterprise value of more than $250 billion.

The agreement has the unanimous approval of both companies’ boards.

The companies will now begin a regulatory process that could take two years, as they seek approval from shareholders and the federal Surface Transportation Board, a five-member panel in charge of the economic regulation of freight rail.

The companies plan to file their application with the STB within six months for a 16-month review process, and aim to close the deal by early 2027.

While that board has also been recently focused on a “commitment to competition” in the industry, many observers have speculated that the new Trump administration would be more open to a merger than that of his predecessor.

Credit: AP

A Union Pacific train travels through Union, Neb., July 31, 2018. (Nati Harnik/AP FILE)

When asked about broad industry merger speculation at an investor conference in May, Norfolk Southern CFO Jason Zampi said he sees “a lot of benefit in a transcon merger. I think there could be a lot of synergies there and cost takeout.”

He noted, however, the “regulatory framework is pretty challenging right now.”

“We’ll see how it shakes out,” he said.

The STB is chaired by Patrick Fuchs, a Trump appointee who is serving his second term. The fifth seat remains vacant.

Fuchs had previously served as a senior staffer to U.S. Sen. John Thune (R-S.D.) on the Senate Commerce Committee.

Vena expressed confidence that the transaction “serves the public interest and meets relevant requirements.”

“We have continuous discussion and dialogue with all facets of government and regulatory agencies in Washington,” Vena said. “We would not have taken the step if we don’t feel comfortable that we can deal with any of the issues that come forward, and that’s the best way to describe any discussions we’ve had.”

CFRA Research analyst Emily Nasseff Mitsch wrote in a note to investors the group “believes the odds favor STB approval despite intense regulatory scrutiny facing railroad mergers.”

If Union Pacific does not close the deal, it would face a $2.5 billion breakup fee.

If the STB were to approve a merger between Union Pacific and Norfolk Southern, another is likely to follow, said Loop Capital industry analyst Rick Paterson in an interview last week.

“It’s both or none,” Paterson said of the two other American-owned Class 1 freight railroads, BNSF and CSX, which would likely also merge to continue to compete.

Reuters reported last week BNSF has hired Goldman Sachs to help it explore its own merger, and CSX was looking to hire its own bankers. But Warren Buffett told CNBC no one from Goldman had talked to him about a takeover by Berkshire Hathaway-owned BNSF.

That could ultimately mean consolidation of the industry from four American-owned freight railroads to two transcontinental ones.

In 1980 there were 40 Class 1 railroads, according to the STB.

Union Pacific-Norfolk Southern merger

Union Pacific

$24.3 billion in 2024 operating revenue

Closing stock price, July 28: $229.24

CEO Jim Vena

Employees: 32,400

Headquarters: Omaha

Route Miles: 32,880

Norfolk Southern

$12.1 billion in 2024 operating revenue

Closing stock price, July 28: $286.42

CEO Mark George

Employees: 19,600

Headquarters: Atlanta

Route Miles: 19,200

The combined company, to be called Union Pacific after the merger:

$36 billion in 2024 operating revenue

NS shareholders will get 1 UNP share and $88.82 in cash for each NS share