The Scene
For weeks, railroad executives have played footsie in public, touting the benefits of mergers that would turn regional players into coast-to-coast juggernauts. Investors, too, have caught the bug, bidding up shares of smaller carriers most likely to be acquired. But their enthusiasm hinges on one question: Will the industry’s regulator be on board?
Try him.
Patrick Fuchs, the 37-year-old chairman of obscure and quaintly named Surface Transportation Board, has signalled what colleagues and industry players are interpreting as an openness to consolidation, or at least a clean break from the reflexive antipathy of his predecessor to deals. A focus on fact-based and impartial reviews could open the door for an industry that has long wanted to consolidate — in part to compete with Canada’s transcontinental giants — but for much of the past two decades has been thwarted by Washington.
“I think it’s a win,” Union Pacific CEO Jim Vena said of consolidation in an interview earlier this year. “On the regulatory front, it’s complicated.”
“I see a lot of benefit,” Norfolk Southern’s chief financial officer, Jason Zampi, said in May. “I also view the regulatory framework as pretty challenging.”
Vena has privately expressed a desire to acquire either Norfolk Southern or CSX Railroad, according to people familiar with his thinking, though Union Pacific hasn’t taken concrete steps to move in either direction, in part because of the uncertain odds of approval. A Union Pacific spokesperson declined to comment.
Vena was also sharply criticized early in his tenure as CEO by Fuchs’ predecessor, Martin Oberman, who accused Vena of pulling off “accounting maneuvers” and headcount reductions to prop up Union Pacific’s stock price at the expense of its infrastructure and maintenance (Vena has improved Union Pacific’s train performance and stock price.)
The STB’s predecessor agency was created during the Gilded Age to regulate the burgeoning railroad industry. Today, it adjudicates disputes between railroads and their customers, service issues, and, most significantly, whether mergers can go forward or not. The last one to get the green light was in 2021, when Canadian Pacific merged with Kansas City Southern, a smaller US carrier.
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Rohan’s view
Fuchs’ shift is subtle, and he declined to comment. But paired with the Trump administration’s focus on rebuilding America’s industrial might, it’s rightly seen as an invitation for would-be acquirers to make their case. Promising railroad mergers and all matters a fair shake, decided on the merits and with the benefit of the president’s nationalist economic agenda, could be enough to coax Vena and his peers to try.
If Union Pacific were to pursue a deal, it would force the hand of the other big West Coast railroad, Warren Buffett’s BNSF. To stay competitive with a beefed-up Union Pacific, it would likely need to strike a deal for whichever East Coast railroad — CSX or Norfolk Southern — Vena doesn’t snag.
Room for Disagreement
Rail mergers are impossibly difficult even with favorable regulatory conditions. Unionized workforces, jittery customers, and reams of paperwork and filings may give pause to CEOs wary of messing with already pressured stocks.
Notable
- As Gordon Haskett’s Don Bilson points out, Fuchs was formerly a staffer for Senate Majority Leader John Thune, who in the early 2000s lobbied for big railroads. Helpful!
- Some rail executives remain leery, thanks to heightened merger guidelines that require any deals to increase market competitiveness, not merely maintain it.