What a week this was for unexpected twists and turns in the Class I railroad merger landscape.
First, on Monday Berkshire Hathaway Chairman Warren Buffett said the company would not bid on CSX or Norfolk Southern, which had been viewed as potential merger partners for the Berkshire-owned BNSF Railway. A BNSF-CSX combination, in particular, had been viewed as the logical competitive response to the $85 billion Union Pacific-Norfolk Southern transcontinental merger proposal announced last month.
Instead, BNSF will focus on extending its reach through interline partnerships. Last week BNSF and CSX announced new joint domestic and international service. The railroads said this was unrelated to the UP-NS merger, but now it’s clearly a part of the merger discussion.
Second, Canadian Pacific Kansas City said on Tuesday that Class I railroad mergers are not necessary and that it isn’t interested in participating in an immediate round of consolidation. Activist investor Ancora Holdings, which has a small stake in CSX, earlier this month urged CSX to engage in merger talks with both BNSF and CPKC.
But CPKC said an initial transcontinental merger would pose a huge risk to customers, employees, and the broader supply chain given the way megamergers have historically produced integration-related service meltdowns. The railroad contends that the industry can grow through more interline agreements, like the CPKC-CSX service linking the Southeast with Texas and Mexico via their new interchange in Myrtlewood, Ala. (Never mind that Canadian Pacific and Kansas City Southern touted single-line service as a key benefit of their 2023 merger. Flip, meet flop.)
Third, on Wednesday President Donald Trump dismissed Surface Transportation Board member Robert E. Primus, a Democrat who cast the lone dissenting votes against the CP-KCS merger and Canadian National’s acquisition of regional Iowa Northern Railway.
The unprecedented White House decision — which Primus said he would challenge — for now leaves the board with two Republicans and a lone Democrat just months before the UP-NS merger application will be filed.
Some industry observers viewed this as a sign that the Trump administration favors the UP-NS merger as part of its goal of beefing up U.S. manufacturing. “Trump has now stepped into the rail … arena and shown his cards on a potential transcon in favor of a merger,” TD Cowen analyst Jason Seidl wrote in a note to clients.
These three developments suggest that the remaining Class I railroads will line up against UP-NS. This is nothing new. In fact, it’s a tradition in the rail industry, where CEOs don’t like any merger that is not their own.
They’ll urge the STB to reject the merger outright, arguing that it does not meet the board’s tougher 2001 review rules that require Class I combinations to enhance competition and be in the public interest.
But the Class I’s also will seek major concessions that could be imposed as part of regulatory approval of the transcon deal, such as access to sole-served shippers on the UP-NS system. Their hope? That the conditions are so onerous that UP and NS scuttle their deal.
Now back to the interline agreements that BNSF, CPKC, CN, and CSX have all advocated. (For the record, long before merger talks surfaced CSX CEO Joe Hinrichs said he was baffled that railroads did not cooperate more often — and suggested that they team up to provide their joint customers with better service.)
The STB’s 2001 review rules urge railroads to consider steps short of mergers. Alliances and partnerships, the board said, could realize some of the growth benefits of mergers without the risk of widespread service disruptions.
What’s shaping up here are two competing visions for the future of the North American freight network.
On one side, BNSF, CPKC, CN, and CSX will argue that mergers are not necessary and that they can successfully make interline agreements work to the benefit of shippers, the public, and the rail industry.
This week’s developments show that the STB won’t be judging two transcontinental mergers in tandem, as many industry observers had predicted in the wake of the UP-NS announcement. Instead, the board will be presented with dueling views. It will essentially have to choose between the status quo and the creation of the first U.S. transcontinental railroad.
The STB will do so, however, knowing full well that approval of UP+NS ultimately will lead to two go-everywhere U.S. systems. The other Class I railroads may be against mergers now. But that will change in a hurry if they’re faced with a coast-to-coast juggernaut in the form of a 52,215-mile Union Pacific system.
A wildcard now is the STB itself. As the president seeks to exert more control over independent agencies, will the board simply roll over and rubber stamp the merger if that’s what the White House wants? Or will its members take a data-driven approach to UP+NS and evaluate it on the merits?
You can reach Bill Stephens at bybillstephens@gmail.com and follow him on LinkedIn and X @bybillstephens
I’m surprised that UP chose NS vice CSX. UP+CSX would practically have been an end-to-end merger, and largely avoided the consternation over duplicate lines, litigation, traffic deals, spin offs, communities aroused over losing service, etc. Those things can make mergers enriching for the legal community at the expense of the stockholders.
I predict the UP-NS merger will become a worse mess than the UP-SP merger was.
And I counter by saying that IF THIIS TRANSACTION IS ALLOWED TO PROCEED, (And that is a BIG IF) It will take all the lessons learned from recent history (the last 30 years) and make it the most successful combination of railroads in US History. UP has been working toward this for 3 years. They have updated their IT with state of the art technology and will use artificial intelligence to combine the companies without the complications of manual integration of opposed systems. They will also operate the combined companies as two systems, East and West, to reduce the opportunity for one system’s problems to affect the other while driving both to be complimentary of each other. It will also be more gradual in assimilation than before so integration can occur at a more basic level than a forced top-down hammer as many mergers have been. But again, it has to be approved first. And if not, everything will be in place for a two-team “partnership” that will provide all the benefits of a merger without giving anything up to anyone else… Its a win-win for UP/NS no matter what the decision is…
How soon they forget. For years Canada and Mexico tried to run a national railroad but finally gave up and let them go private , where they have done quite well.. Gee, how many years did the SP, UP, MP, etc take to get in over? At least 3, and now they want to get even larger. One question: When will they learn.
And if a strike comes on the merged companies? Oh, yes I forgot prior gov’t actions (the strike becomes so bad the government will stop it), so here we will go again. Nuts.
“Data-driven approaches” and “evaluation on the merits” are very much out of fashion in DC these days.
“But CPKC said an initial transcontinental merger would pose a huge risk to customers, employees, and the broader supply chain given the way megamergers have historically produced integration-related service meltdowns. ”
COKC should know, having participated in the latest service meltdown!
The vision that this White House has an idea and a plan while Warren Buffett and BNSF do not just doesn’t comport with the general reality I live in.
We will see what happens. My hope is that this situation can result in the RR transportation industry shedding some of its more dysfunctional pathologies. Only a hope….
Interesting that the railroad, CPKC, who made a merger crossing two international boundaries says mergers are not necessary.
They are like the environmental crowd… They want to outlaw the buying of new SUV’s or developments and cabins in the mountain after they have already bought theirs…Their argument becomes rather HOLLOW,
This is exactly what UP and NS were hoping for. Usually (but not every single case) mergers need the correct political wind to move them along.
I believe BNSF was caught off guard by the UP-NS merger proposal, which is surprising.
Buffet’s response was decisively tepid, as if none of the BNSF top brass had ever seriously considered the possibility. I have heard nothing, so far, that changes my thinking.
Either UP or BNSF was going to test the merger waters again. Many had thought there would eventually be BNSF+NS. But thats certainly looking unlikely now.
“A BNSF-CSX combination, in particular, had been viewed as the logical competitive response to the $85 billion Union Pacific-Norfolk Southern transcontinental merger proposal announced last month.”
Logical by whom? Certainly not Warren Buffett or Greg Able, top dogs at Berkshire Hathaway who see only Government and other railroads meddling in their “business,” that being unfettered decisions and success in taking care of their VERY LARGE customers, J B Hunt and CMA-CGM, the two largest intermodal companies in the world. As usual, Buffett has a point. Why give up ANY of your physical plant if you don’t need to and get the same result from an alliance which can be canceled any time through proper notification.
Most of the folks here and on Wall Street just don’t get it. Making Money IS very important to BH/BNSF. But keeping it is more important. Remember something Buffett once said, that railroads, “won’t make you rich but they will keep you rich.” But that is only true if you don’t have to give up what attracted you to them in the first place, STAYING RICH. READ IT HERE: BNSF WILL NEVER MERGE WITH ANY OTHER CLASS ONE RAILROAD. Put it in the bank…It’s not rocket science…
Can only three members make a decision? Two vacancies are not important?
NO, they will have another nominated by Patrick Fuchs. Primus got the boot because he thinks like a bureaucrat. Take your time, you are in no hurry. Well, Fuchs is a mover and a shaker and believes that time is money and people deserve a timely decision, not one that agonizes on for months. I for one, agree with that philosophy. Approve it or turn things down and explain why so people can make decisions and either move on or make changes that will gain approval. That was a campaign promise by Trump. to streamline government agencies so that they work for the people of this country not against them. Just ask those who lost homes in the California fires of Pacific Palisades and Eaton. It’s not the federal government holding up their rebuilding plans… Promises made, Promises kept, in my opinion.
The STB will just roll over as that is what the White House wants.