Reports: Union Pacific, Norfolk Southern in early merger talks

Union Pacific Railroad and Norfolk Southern Railway are engaged in early merger talks, The Wall Street Journal and other national news organizations are reporting.

Spokespersons from both Class Is declined to comment on the reports.

If a UP-NS merger would occur, it would create the largest railroad in North America that would connect the East and West coasts.

In an investment "Flash" to clients, senior research analyst Daniel Moore at Baird Equity Research Industrial today noted that UP CEO Jim Vena has previously expressed support for the concept of a transcontinental rail network and has articulated the long-term value such a combination could deliver.

"We believe what we may be currently observing is a public vetting process — not a random leak," Moore wrote to provide some context to the reports. "In our view, a transaction of this magnitude, given its regulatory complexity and broad stakeholder interest, would not advance without first testing how investors, policymakers (i.e. the current administration), and industry participants respond to the idea. If a formal offer is made, it will likely be for a reason."

To put the potential strategic value of a UP-NS merger into perspective, Baird introduced a framework it's calling "PSR-Plus," with PSR representing precision scheduled railroading.

"This concept captures two distinct but complementary source of potential value: PSR-related operational improvement and the network synergies one might argue could uniquely be unlocked by a transcontinental merger," Moore's memo stated. He believes that investors are likely to express support for such a merger based on that logic.

In addition, it would align with the Trump administration's focus on strengthening industrial competitiveness.

"That said, there is a meaningful difference between pursuing a transaction and closing one," Moore wrote. "Investors should be mindful that the emergence of this story is likely to trigger a broad set of competing interests. Not all stakeholders will support the deal."

Among stakeholders unlikely to support such a merger is BNSF Railway Co.

"In fact, we would argue that the combination could place BNSF in a position of relative weakness, potentially forcing them to respond — either by contesting the deal politically, countering [UP] with their own offer for [NS], or considering alternative partnerships they might not otherwise pursue," Moore states in his memo.

Baird also suggests the following considerations: 
• There's a clear "first-mover" advantage;

• activist Ancora gained three seats on NS' board in May 2024; 

• Baird continues to believe that the announcement of one transaction would result in a second; and 

• any merger transaction would require approval from the Surface Transportation Board and the U.S. Department of Justice, a process that could take two years or more.