Gilded Age financier Jay Gould dreamed of a transcontinental railway connecting the West Coast with the East Coast of the United States. His dream was never realized. Today, however, the late 1800s business tycoon’s vision is on the cusp of reality.
This week, Union Pacific, UNP, a large railroad, principally operating in the western U.S., said that it had reached a deal to buy Norfolk Southern, NSC, a railroad system that mainly owns tracks east of the Mississippi. The proposed transcontinental network would cross 43 states and operate around 50,000 miles of track. The market is valuing the transaction at about $85 billion.
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A railroad system under a single management structure connecting the two coasts would be positive for the U.S. A single coast-to-coast network would support President Donald Trump’s Administration’s goal of reindustrializing the U.S. economy. In addition, a single network would facilitate faster economic growth to help manage the large federal deficit and provide the resources necessary for national security.
Put simply, the deal makes economic sense. In specific railway benefit terms, the transaction would eliminate economically inefficient interchange choke points where freight is transferred between two railroads. A single rail system would save up to 48 hours on some routes. Time is money. Customers would benefit from a single billing system. Businesses would only have to deal with one railroad.
According to management and analysts, cost savings from the transaction would approach $3 billion.
The new company would have the resources to increase capital investment in the rail system and offer improved pricing for customers. Business could be won back from truckers. The new company would have the financial strength to build its rail network, especially in the Mississippi River basin, an agriculturally rich area. The U.S. enjoys a comparative advantage in agriculture. Local agricultural economies would benefit.
The deal looks like a win for everyone: the country, business, and consumers.
The transaction values Norfolk Southern stock at around $320. Each share of stock would be swapped for one share of Union Pacific stock and $88.82 in cash. This week, UNP stock is trading around $226, and NSC stock is trading around $283. The discount on NSC shares to the $320 deal price reflects the almost two-year delay for final approval.
Unfortunately, left-wing populists claim that the new company would be too large and exercise economic power over potential rail customers. Such thinking is silly. The rails compete against truckers and sometimes air freight companies. Railroads are not monopolies. To compete effectively in a $30 trillion economy, businesses must have scale and strong financial resources. Size and scale are competitive advantages when competing against alternative transportation systems.
The railroad unions will try to stop or delay the transaction. Union workers on the railroads are already well paid, but they will use any opportunity to extract additional money and benefits from rail management. And the market knows that the rail unions will demand job security.
The biggest potential hurdle is the Surface Transportation Board, STB. The Board must approve the merger. At the moment, there are only four members on the five-person STB: two Republicans and two Democrats. The deal could potentially be blocked because of a lack of a majority for approval. However, President Donald Trump has the authority to choose the fifth board member.
Logically, an intense lobbying campaign is underway to persuade the President to choose a fifth board member who favors the deal. The wager is that Trump will say yes to the new company and appoint a pro-transaction fifth person to the STB. A transcontinental railroad would benefit economic growth and the effort to reindustrialize the American economy.
James Rogan is a former U.S. foreign service officer who has worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be followed on X and reached at [email protected].