The Little Railroad Merger That Could

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Pushkin.

All right, quick.

Name as many train songs as you can.

Downtown Train, Midnight Train to Georgia, City of New Orleans, Dixie Flyer, Hear My Train a Comin'.

That's Jimi Hendricks.

Today on the show, this song is, I've been working on a railroad merger and the bankers are going to get paid all the live-long day.

This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin.

I am coming to you from beautiful New York City, home of Unhedged World Headquarters.

And I am joined by Oliver Barnes, who is wearing overalls and a striped engineer's cap today.

Oliver is the FT's deals reporter, correspondent, editor.

What's your real title, Oliver?

All of the above.

All of the above.

Deals Maven.

Oliver, what's going on in the world of trains?

We had a big announcement this week, did we not?

It suddenly got exciting.

Trains are exciting again.

Yes.

So, yeah, there was a tie-up between two of the biggest Class 1 freight railroad operators, Union Pacific, which is a $160,000, $170 billion railroad juggernaut with a ton of track, more than 30,000 miles in the west of the country, west the Mississippi, in a cash and stock deal, largely stock-based, proposed to buy

smaller railroad operator Northwick Southern, which operates tens of thousands of miles of track in the east of the country.

What this will create is a kind of railroad juggernaut, a railroad behemoth,

whereby now you'll join up two companies and allow

people to ship goods direct coast to coast.

America's first transcontinental railroad is how the companies were selling the deal.

And, you know, it was an $85 billion

acquisition when you look at enterprise value, including DAP.

That's not small.

That's one of the biggest deals we've seen in many, many years.

In summer, which is normally quite a fallow time for deals, it suddenly got pretty exciting.

Big daddy.

This is what you live for as a deals report.

Hell yeah.

Okay.

So, I mean, I guess we should say

that the history of railroad consolidation in this country is one of the richest histories of consolidation.

You can call up these graphics on the internet where it's like four or five hundred companies, and then one by one they buy each other and work their way down.

So we've had wave after wave and this might be the final one.

And often those histories are reflected in the names, right?

You know, it's like Norfolk Southern at one point.

That was.

It was the Norfolk and the Southern.

Exactly.

BNSF is Burlington North Santa Fe.

Santa Fe.

Correct.

Exactly.

Union Pacific.

So you and yeah, you can watch these maps as they basically gradually consolidate.

And I think, you know, at one point in the 1800s, many moons ago, before my time, before your time, rails were like a growth stock of sorts it was like damn like these things that you know chug across the country and move goods and you know the industry were quite refracted and then you had these railroad barons the likes of Gould and Vanderbilt who you hear about all the time you know in history books who tried to consolidate the industry for their own ends and you know there was market manipulation and yes and and and monopoly control and and then actually weirdly through some of that consolidation that happened more than 100 years ago, most of it, you actually get some of the early beginnings of antitrust laws and some of the controls on monopoly powers in America.

So the story of dealmaking in the railroad industry

is a rich history.

Here's something I don't quite understand.

On the one hand, you just said that

the history of American monopoly law and the history of railroad consolidation are linked.

But if you think about the structure of the industry, if you have a set of freight tracks that are running from, I don't know, Santa Fe to Los Angeles or whatever it is,

having a second company doing the same thing is just inefficient.

What I'm saying is, isn't this an industry that leads to a natural monopoly?

Might not monopoly or monopoly-like state be the most efficient way to have a railroad?

And isn't that sort of reflected around the world?

I'm getting a flashback to like the investor call earlier this week after they announced the deal.

I'm not trying to come in on the side, but I'm just saying in most areas, there should be one set of tracks.

And I guess you could have different companies running cars on the same set of tracks.

For sure, for sure.

If you look at like other countries, you know, like the country I'm from, the UK, if you look at France, Russia, China, in many different kind of ways, sometimes it's a state-controlled monopoly, sometimes it's a private-public partnership.

But basically, they have some kind of sanctioned monopoly control of the railroads right because it makes sense doesn't it you want to get from you know kansas city to new york it would be good if you just do it on on one way and so exactly and this is exactly how jim venner who's the ceo of of union pacific and mark george who's the ceo of norfolk southern are trying to sell it which is that at the moment there's a clunkiness to the whole process which is if you want to ship you know if you're if you're a chemicals maker moving large amounts of chemicals if you're an automotive company moving cars, if you want to ship your goods west to east or east to west, at the moment you have to go through these interchange points, which are really clunky and there's a massive log jamming.

So they're literally taking the cars off one train and putting them on another in some in some circumstances, yes.

That is mad.

And the main interchange point is Chicago, right?

And they literally load them all off one and load them all in another.

And it's it's inefficient.

So the way these,

you know, the executives and the boards on both sides are trying to sell this deal is, you know, we are fulfilling the dream.

In fact, in the deal press release, Jim Venner mentions Abraham Lincoln.

I mean, how often do you see that in a deal press release?

I've never seen it before.

He's saying, we're fulfilling the dream of Abraham Lincoln 165 years ago to finally realize America's first transcontinental railroad.

And

the earnings, the investor presentation had two massive trains in America's first transcontinental railroad.

And this, for me, hints at another side of it, which is that both sides see an opening.

And the opening is that they have a president in Donald Trump in Washington, D.C., and a political atmosphere that will be responsive to this.

Because this is, you know, Trump version 2, make America great again, again.

And

this whole idea of a transcontinental railroad could be sold to D.C.

as a boon for American infrastructure.

Obviously, the companies want to get it done.

And there's this great patriotic pitch about realizing the dreams of our founding fathers and the 19th century and manifest destiny.

There weren't actually railroads at the time of the founding fathers.

It was their dream.

They didn't even know it though.

But who's against it?

Good question.

And that will be incredibly important to the politics of all of this.

So there's lots of constituencies that care about the rails.

There's the companies that pay for their freight to be shipped on the rails.

They'll have a say.

There's the competitive modes of transport, trucking businesses, for instance.

They will have a say.

But probably most important to all of this is the unions.

The rails are highly unionized.

And since the deal was announced earlier this week, most of the unions have come out against the deal.

Smart, which is the big union, Transportation Workers Union of America, my favorite one, the Brotherhood of Railroads Signalmen, they don't like it.

And that's because they fear job cuts.

And they've also argued there could be safety concerns.

And presumably they'd have less negotiating leverage against a larger company that employed more of the sum of railway workers generally.

What about regulators?

We've talked on this show before about how there is something of a split identity within the Trump administration.

There's the Trump administration that is just very pro-business and laissez-faire, as you were, and just generally is in favor of things that are large.

Big and beautiful.

It's a big and beautiful railroad margin.

But there's also this kind of anti-big business, slightly J.D.

Vancey

populist streak to it.

So what do we expect from the regulators here as this deal pushes through?

Most of the locus of J.D.

Vance's ideas of antitrust focus on big tech, don't they?

Right.

And I feel like big tech, maybe at one point the railroads were big tech, but at the moment they don't really feel like like big tech.

They're big tech circa 1910.

Exactly.

Something like that.

Exactly.

They're metal and steel and yes.

These are the kind of industries that they have warmer feelings towards.

Exactly.

So I suspect just optics-wise, that's a big

part of it.

The actual mechanisms of antitrust in the railroad industry are quite idiosyncratic because most of the time when you're thinking about antitrust regulators or watchdogs or whatever the term we use, you're thinking about the antitrust division of the Justice Department or the Federal Trade Commission.

In the case of the railroads, actually most of the power has been vested in this rather unique body with five commissioners on it, which has a Republican commissioner at the top and actually at the moment has a seat empty called the Surface Transportation Board.

And some of the history of this tells you a little bit about railroad mergers.

It didn't exist until the 90s, which is when there was the last flurry of consolidation.

It was at that point that I think Union Pacific was born, like the entity that is now Union Pacific.

And then it was given more powers in the early 2000s.

And it's those rules and regulations which will dictate how and

how Washington entertains this deal.

Are we slightly overthinking this, Oliver?

Doesn't it just come down to the content of the truth social post?

that will inevitably come from the president?

Am I simple?

Well, there are lots of lawyers and bankers paid to overthink this, so don't question them too much, Rob.

But basically, you know, yes, in a sense, I think that's probably where it's ultimately headed.

At the moment, they've notified the Service Transportation Board, the STB, that this merger is taking place.

By, I think, early next year, they'll have to...

do like a full pre-merger document explanation of everything.

And then the STB will go out to all these vested parties and try and work out what effects it has.

And maybe they'll offer some divestitures and stuff like that.

But all those technicalities are probably not that important.

Really, the most important part of this is when this deal falls on the desk of the deal maker-in-chief, the man behind the art of the deal, Donald Trump himself, how he responds to it.

And I think the calculation of the executives and the boards at both Union Pacific and Northwick Southern is that we can sell this to Trump.

You're a deals reporter.

Is this a generalizable point that really

dealmaking in America has become

a matter of romancing Donald Trump.

I think you certainly see that in some deals.

The most obvious one is the partnership, I say, in a vote of commerce, between Nipon Steel and U.S.

Steel and Trump's decision to assent that.

And why do deals like this matter to Trump?

Because they strike at the heart of two of his main constituencies, which is Money Men on Wall Street.

and Rust Belt America, right?

And that's why he's interested in these things.

I don't know how much attention he's paying to the railroads now.

I doubt.

I think he's probably got some other things on his plate.

But at some point, this will cross his desk.

And yes,

it's how it can be sold to him.

And that's why I think we saw this kind of phrasing in the deal, like harking back to Abraham Lincoln and America's first transcontinental railroad.

It sounds big.

It sounds important.

It sounds trumpy.

Yes.

Let's turn to the industry response.

So now we have Burlington, Northern, Santa Fe, CSX, Canadian Pacific, and Canadian National, the Class 1 railways facing an utterly transformed competitive landscape if we assume this deal goes through.

How are those players going to respond?

There's going to be some FOMO.

I mean, the benefit for Union Pacific is you look at all these synergies.

There's huge revenue synergies and huge cost synergies.

And there's also a huge selling point to customers.

I can run a train coast to coast.

It's quicker.

It's more efficient, right?

So particularly when you're focused on BNSF, which like UNP, has a large network in the West, and then CSX, which like Norfolk Southern, has a large network in the East.

The question is, what do those two do?

Will they now get together and do something?

Will there be a merger there?

The CEO of CSX, which is the other target in this situation, because there's been a lot of chatter in the market about this for a while.

The CEO of UNP, Jim Venner, went out in the trade press a few months ago and was like, consolidation seems like a good idea.

You know, it was the trial balloon.

He floated it.

At which point everyone started, you know, people like me started calling around and being like, what's going on?

And it was the question was always, is he going to go for Northwick Southern or is he going to go for CSX?

Well, we now know that he's gone for Northwick Southern.

So the other target sitting out there is CSX.

And it has a lot of similar dynamics to Northwick Southern.

There's an activist on the board.

It's also had a lot of internal machinations and isn't a particularly perfectly well-run company at the moment.

And in fact, the activist who's on the board of Northwick Southern, or who's put independent directors on the board as part of an agreement with the company, has said just in the past few days that it's building a stake in CSX.

So, this all, this kind of agitation, this kind of smoke without no smoke without fire is exactly what signals to people like myself, which is like, what's going to happen now between BNSF and CSX?

And there's a huge strategic logic for them to try and get together.

There were some kind of rumors out there that Berkshire Hathaway, you know, Warren Buffett and Greg Abel had broken with the habit of a lifetime and hired some advisors, which Warren Buffett tends not to like to do, had hired some advisors to look at a deal for CSX and then Buffett went on CNBC and shut that down and completely refuted the idea of it.

But of course, that's at the minute.

That doesn't mean tomorrow, the day after, the week after.

But it makes it a bigger deal in a way for the regulators or whoever is making the decisions on behalf of the government, in that if you're okay to go from four to three,

you're kind of saying that you're okay going from three to two.

Exactly.

So there's two Americans and the Canadians or some combination thereof.

Exactly.

And if you're Buck Shah Hathaway,

the way that you play your cards right now,

you probably want to get some smoke signal from Washington that this deal will pass.

Yes.

Because if UNP doesn't get this deal across the line, they owe Northwick Southern $2.5 billion as part of the break fee.

So they want to watch and try and read like BNSF and Berkshire Hathaway will want to watch and try and read the tea leaves for how Washington responds to this deal.

And

they may get solace within the first few weeks and decide to move.

It may take them months.

But I think there is a clock ticking in that if we take it as Union Pacific decided to do this because they saw an opportunity because of Trump, you know, that means that BNSF probably wants to act in the next year, year or two, because it takes a long time for these deals to close.

Like this is the interesting thing.

When I, you know, there's so much a part of deal making that I'm focused on, which is is up to the announcement, you know, the bankers getting together, working on price and stuff like that.

This was actually very friendly and pretty simple.

It was very stock-based, as most of these things are.

The company wanted to sell.

UMP wanted to buy.

They made an announcement.

It was all fun.

The challenges begin now in the road of how you get this deal through.

Because the last time there was a railroad merger, which was in 2023 when Canadian National bought Kansas City Southern, Southern, that took 22 months to get through.

They have said that the companies that have merged this week have said that it will probably take two years.

That might even be quite an aggressive timeline.

It will be some point into 2027 that this takes to get done.

So that starts the clock ticking on when BNSF needs to act.

So actually there's a broader thing here, which is, you know, on Tuesday, we saw this railroad merger.

We saw another like $13 billion industrials deal.

We saw like $100 billion of MNA on on one day.

That's not particularly normal, and that's not normal during summer.

There's something that this hints at, which is

the markets are not in the easiest place at the moment.

There's a bit of uncertainty still.

There's still very, quite high interest rates.

Debt isn't in the easiest place.

If you're trying to sell a small private equity company, maybe it's not the easiest time to sell it.

But if you're a big strategic SP 500 company that has long wanted to do a deal that will probably cross the desk of regulators and people in DC

now feels like, in the minds of a lot of people, the time to go and do it.

Time to take a big swing.

Time to take a big swing.

Time to head for the big, beautiful deal.

And I think that's one of the things we're going to see.

You know, the end of the Trump administration, I think we're going to see a lot of large deals, large strategic deals.

Lots of other shoes to drop.

The next shoe to drop for us is Long and Short, which is just after

this short break.

Speaking of alternatives, PGM's monthly podcast discussing trends and strategies in alternative investing.

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Welcome back, listeners.

This is Long and Short, which is the portion of the show where we go long things we like and short things we don't.

Oliver, are you long or short something today?

On the thematic point, I'm short something.

Tell me.

The canteen cart on Amtrak Trains.

You're short it?

Short.

Why?

You don't like the food?

Don't love it.

I only get water from it whenever I

and I see like fellow customers, it's expensive, and I see fellow customers get that like microwavable burger.

And I'm like, no thanks.

I have

a long, and this is a cautious and dangerous long I have.

It's been a sweltering week in New York, and I think...

Shorts at the office might have a future.

I cannot wear, it's horrible to say it, but I can't live like this.

I am sweating my body weight every day.

I can see a new classic Rob Armstrong column in the making.

Yeah, it could happen.

I don't know what kind of shorts we're going to wear to the office or what color they're going to be or what the rules are, but we can't live like this anymore.

Global warming has changed everything.

Listeners, we will be back in your feed next week with a business, finance, and economics podcast that will also change everything.

In the meantime, stay cool out there.

Unhedged is produced by Jake Harper and edited by Bryant Erstad.

Our executive producer is Jacob Goldstein.

Topher Vorges is the FT's acting co-head of audio.

Special thanks to Laura Clark, Aleister Mackey, Greta Cohn, and Natalie Sadler.

FT Premium subscribers can get the Unhedged newsletter for free.

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Just go to FT.com/slash unhedged offer.

I'm Rob Armstrong.

Thanks for listening.