The Little Railroad Merger That Could

Robert Armstrong (0:06)

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-Cummin. That's Jimi Hendrix. 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?

Oliver Barnes (1:08)

All of the above.

Robert Armstrong (1:08)

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?

Oliver Barnes (1:19)

It suddenly got exciting. Trains are exciting again.

Robert Armstrong (1:22)

Yes.

Oliver Barnes (1:23)

Choo-choo. So, yeah, there was a tie-up between two of the biggest class one freight railroad operators, Union Pacific, which is 160, 170 billion dollar railroad juggernaut with a ton of track, more than 30,000 miles in the west of the country, west of Mississippi, in a cash and stock deal, largely stock-based, proposed to buy smaller railroad operator, Norfolk 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 to 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 it was an $85 billion acquisition when you look at enterprise value, including debt. 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.

Robert Armstrong (2:33)

Big daddy. This is what you live for as it deals with.

Oliver Barnes (2:36)

Hell yeah.

Robert Armstrong (2:39)

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 500 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.

Oliver Barnes (3:05)

And often those histories are reflected in the names, right? You know, it's like Norfolk Southern at one point.

Robert Armstrong (3:11)

Yeah, it was the Norfolk and the Southern.

Oliver Barnes (3:12)

Exactly. BNSF is Burlington North Santa Fe.

Robert Armstrong (3:16)

Santa Fe.

Oliver Barnes (3:17)

Correct. Exactly. Union Pacific. So, and yeah, you can watch these maps as they basically gradually consolidate. And I think 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 chug across the country and move goods. And 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 in history books, who tried to consolidate the industry for their own ends. And there was market manipulation and monopoly control.

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 deal making in the railroad industry is a rich history.

Robert Armstrong (4:16)

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 reflected around the world?

Oliver Barnes (4:58)

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

Robert Armstrong (5:03)

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. I guess you could have different companies running cars on the same set of tracks or whatever it is.