OMAHA, Neb. — Union Pacific CEO Jim Vena and Norfolk Southern CEO Mark George first broached the possibility of a transcontinental merger during an otherwise routine phone call on Dec. 18, the railroads disclosed in a preliminary shareholder proxy filed on Tuesday.
The proxy form provides a detailed timeline for their merger discussions, including the haggling that led to the $85 billion deal that was announced on July 29. NS rejected UP’s initial June 20 offer valuing NS at $280 per share, then turned down a $310 follow-up. NS ultimately accepted UP’s $320 per-share bid — a 14% increase over the opener.
UP and NS also disclosed that potential concessions necessary for regulatory approval could reduce planned synergies by as much as $750 million, to a net of $2 billion.
The railroads have previously said they expect $2.75 billion in synergies, including $1 billion in cost savings and $1.75 billion in earnings before interest, taxes, depreciation, and amortization from revenue initiatives.
The $750 million concession-related haircut likely reflects a combination of potential traffic losses, pricing actions, and trackage rights remedies, Bascome Majors, an analyst with Susquehanna Financial Group, wrote in a note to clients.
UP did not expect to have to offer major concessions, such as selling off parts of its network, to enhance competition, Majors wrote, citing conversations with UP management.
UP and NS also said that in order to achieve the projected merger synergies they will have to spend $2 billion on capital expenditures in the first two years as a combined railroad.
Before shareholders can vote, the proxy must clear Securities and Exchange Commission review. The railroads said they anticipate holding shareholder meetings in late November or early December, timing that depends on the SEC process.
UP and NS considered each other their best merger partners and never entered into talks with other Class I railroads. After their initial Dec. 18 discussion, Vena and George informed their boards of the potential advantages of a transcontinental merger.
The two CEOs did not speak again until a March 18 meeting in Washington, when they were both in town for an Association of American Railroads meeting. Vena, in an April 1 phone call with George, suggested that they begin preliminary merger talks, which led to an initial meeting on May 15.
On June 27, the Norfolk Southern board and executive team weighed a standalone plan, the risk that UP might pursue another partner, and whether NS should consider a different merger candidate.
“The Norfolk Southern board also discussed industry trends and the difficulty Norfolk Southern and the industry has had, and risked continuing to have, in achieving significant growth on a standalone basis, including due to lower volumes because of truck market penetration, and the potential for a transcontinental merger to break through these challenges,” the preliminary proxy says.
UP held a similar session on July 1, where the board considered whether to continue talks with NS or consider another partner, which it identifies only as Party A. Presumably this is a reference to CSX, the only other railroad UP could acquire to form a U.S. transcontinental system.
On July 22, the CEO of Party A contacted Vena regarding a potential transaction. UP and NS signed an exclusivity agreement the following day and agreed not to speak to alternative rail partners. Party A’s chairman later called UP Chairman Michael R. McCarthy on July 27, two days before the UP-NS deal was announced.
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