Industry analysts, stakeholders react to UP-NS merger proposal

By Julie Sneider, Senior Editor

Analysts, shippers and other rail industry stakeholders continue to react to yesterday’s announcement that Union Pacific Railroad and Norfolk Southern Railway reached an agreement to merge.

Under the deal, UP would acquire NS in a stock and cash deal that values NS at an $85 billion value. The merger would create the first U.S. transcontinental railroad network, one that would span more than 50,000 miles. 

The transaction is expected to result in $2.75 billion in annualized synergies and economies. The proposed merger requires approval from the Class Is' shareholders and the Surface Transportation Board.

The STB will examine the UP-NS combination under newer rules that require railroad mergers to enhance competition, independent industry analyst Tony Hatch said during an interview yesterday on Bloomberg Surveillance Podcast.

Under the old rules, the merging parties had to convince regulators only that the combination would maintain competition, said Hatch, who also is the program consultant for Progressive Railroading’s annual RailTrends conference.

“In [the railroads’] presentation, they wrapped themselves up in the flag in a big way to appeal to the White House and they kept talking about how it enhances competition,” said Hatch. “The old rules were that you just maintain existing rules of competition; enhancing competition has never been defined and it makes it a little scary.”

Many in the rail industry have long said that creating a transcontinental railroad “makes sense” and would be good for the railroads, their shareholders and customers, he said.

“However, if [UP and NS] have to give away the store as we’ve seen in previous merger attempts and the $2.75 billion gets whittled down because of what they have to give to each community, then maybe it’s not so great,” Hatch said.

The STB will pay careful attention to what shippers say about the proposal, Hatch and others said yesterday. For major shippers that have never dealt with the service problems that have occurred following previous railroad mergers — companies such as Walmart, Target and Amazon — a coast-to-coast rail network might be appealing.

For those types of businesses, rail until now has been under the radar. That would change with the existence of a fast and reliable transcontinental railroad, Hatch noted.

For freight-rail shippers that have experienced prior railroad mergers and their subsequent service problems, they might be more skeptical of the UP-NS deal. Already, some oppose the merger.

Officials with two trade associations that represent the chemical industry — the American Chemistry Council and Alliance of Chemical Distributors (ACD) — said they have serious concerns about it.

“Following prior rail mergers, freight rail has not served the needs of its customers who inevitably pay increasingly high rates for unreliable and inadequate service,” said ACD President and CEO Eric Byer in a press release. “Despite persistent deteriorating rail service, railroads are rarely held accountable for supply chain disruptions caused by extensive monopolies and an outdated regulatory system.”

Also opposing the merger is the largest rail labor union, the SMART Transportation Division. The union's officials said they will ask the STB to reject it because of the potential effects on rail workers, safety, service quality and the long-term health of the freight-rail industry.

For Brotherhood of Locomotive Engineers & Trainmen (BLET) officials, it's premature to speculate on any merger outcomes, but the union's position is "unequivocally the protection of our members’ jobs, rights and agreements," they said in a statement.

"Before we can even consider the complex implications of a merger, our first and most immediate priority is concluding the current round of contract negotiations. These negotiations are essential to securing fair compensation and working conditions for our members," BLET officials said. "We call on both carriers to demonstrate their commitment to the men and women who keep their railroads running by reaching agreements with BLET without further delay. This merger proposal must not become a distraction or an excuse to postpone long-overdue bargaining."

Meanwhile, the merger could mean better service for Amtrak long-distance passenger trains that operate on UP tracks between New Orleans and Los Angeles, Hatch said.

In most states — except for the Northeast Corridor where Amtrak owns the track — Amtrak trains run on track hosted by the Class Is, which are supposed to give preference to Amtrak trains operating on their lines. In the Northeast Corridor, NS trains use Amtrak track.

Amtrak yesterday declined to comment on how it could be impacted by the merger. But Rail Passengers Association (RPA) officials said they will be “actively involved” in the STB proceedings.

“Frankly, America’s passengers and shippers have good reason to treat this news with skepticism,” RPA officials said in a statement. “The past decade has seen Class I railroads steadily losing market share to trucking in pursuit of shareholder dividends. While that’s been good for Wall Street, it’s meant worse rail service for passengers and shippers in the rest of the country.”

Currently, both railroads are involved in oversight cases before the federal government for allegations that their dispatch decisions keep Amtrak trains from running on time. UP has a case before the STB and NS has a case in U.S. District Court involving late Amtrak passenger trains.

“The onus is on these companies to prove that this merger won’t simply exacerbate these problems — and we believe that is a very high bar to clear,” RPA officials said.

As for the impact on other Class Is, “all eyes turn to CSX,” said Baird Equity Research Industrial Senior Analyst Daniel Moore in an emailed report to clients.

“We have argued that if we were to see one transcontinental merger attempted, we would likely see a second,” he wrote. “Ultimately, we believe a single transcontinental rail would completely unbalance the playing field. It would leave BNSF ... at a structural disadvantage. In that context, the logic for a second transaction becomes self-reinforcing. If one Western rail moves to acquire an Eastern counterpart, the other may have no real choice but to respond.”