UP, NS Refiled Merger Application: TD Cowen Insight

NEW YORK –– Jason Seidl of TD Cowen shares his insights into the revised UP+NS merger application submitted to the Surface Transportation Board (STB) this week.

Union Pacific’s and Norfolk Southern’s refiled merger application includes a more comprehensive traffic analysis, market share forecasts and revised synergy and capital spend estimates. Negligible concessions are assumed by UP/NS, but we believe they will arise as the companies go through the process. The Surface Transportation Board will have 30 days to review the revised application with an expected comment period.

The STB had rejected the first application on grounds that it was incomplete and encouraged the Class I’s to resubmit with additional information needed to evaluate competitive impacts of a combination. The resubmitted application now includes market share forecasts (projected 39%) and additional disclosures while also addressing the issue of control over a short line post combination, which were elements highlighted by the STB when they sent the parties back to the proverbial drawing board.

The refiled application switches from using the STB’s Carload Waybill sample to comprehensively analyzing UP and NS’s population-level traffic. The outcome is revised synergy and capex estimates. UP/NS see a $200 million reduction in estimated net revenue EBITDA synergies to $1.8 billion by Year 3 on lowered high-yield carload volume synergy estimates (to 404,000 carloads from 425,000 carloads), mitigated by a 200,000 increase in estimated intermodal volume synergies. Expected capital outlay was surprisingly reduced but only slightly. No changes made to tech integration expenses.

UP’s base case assumes that net synergies do not include significant incremental concessions and are formulated after considering the implications of Competitive Gateway Pricing proposal, which remains unchanged. We remind investors that UP had initially estimated $750 million in concessions, which were then eliminated from their forecasts. We believe a combination of this magnitude with the vast number of stakeholders involved will likely see concessions if approved.

UP/NS raised their estimate of union job creation by 33% to 1,200 net new jobs, a higher increase relative to the adjustments to volumes +22%. Union support of the merger has been mixed since the process kicked off, and increased job creation estimates could potentially be an olive branch to the holdouts or keep opposition at a reasonable pitch at the very least.

The application now enters the initial 30-day review for completeness (with a 10-day comment period expected), following which the official comments and evidence phase commences. The typical timeline calls for an STB decision in May 2027 and closing at the end of 1H27. We have acknowledged that the review timeline could get elongated as the Board reviews what will be the most important transaction of the century and would not be surprised to see a Fall 2027 decision. We believe odds are slightly in favor of approval (with concessions), though they have narrowed over the past 6 months, in our view. Not surprisingly, reaction from several Class I’s and certain shipper groups was largely negative. Canadian competitor CN noted that the amended application falls short of addressing competitive harm and urged the Board to recommend concessions. CPKC and BNSF said they were reviewing the application, but reiterated concerns regarding the transaction.