Union Pacific, Norfolk Southern discuss merger to create transcontinental railroad, AP source says

OMAHA, Neb. — Union Pacific and Norfolk Southern are in merger talks to create the largest railroad in North America that would connect the East and West Coasts.

The merger discussions began during the first quarter of this year, according to a person familiar with the talks who isn't authorized to discuss them publicly. It would combine the largest and smallest of the country's six major freight railroads.

Both railroads declined to comment.

Within the industry there is widespread debate over whether such a merger would be approved by the Surface Transportation Board even though those regulators approved the deal that created CPKC railroad two years ago with the Canadian Pacific's $31 billion acquisition of Kansas City Southern railroad.

That merger combined the two smallest major railroads in North America and left only six major freight railroads. But it was the first major rail merger approved in more than two decades.

The bar for railroad mergers in the U.S. was raised substantially at the start of the century after a disastrous combination of Union Pacific and Southern Pacific in 1996 that snarled rail traffic for an extended period, followed by the 1999 split of Conrail between Norfolk Southern and CSX, which created backups in the East.

To be approved, any major rail merger must show it will enhance competition and serve the public interest under the 2001 rules. The CPKC merger was not judged under those rules because Kansas City Southern had an exemption from them as the smallest major freight railroad at the time.

Union Pacific CEO Jim Vena talked earlier this year about the potential benefits of such a merger because it would streamline deliveries all across the country by eliminating the delays that come along with one railroad handing shipments over to another. Plus it would simplify shipping for the companies that rely on railroads to deliver their raw materials and finished products.

But in the past, some shippers have raised concerns about the consequences of being left with even fewer options to ship their goods because the major railroads are already so powerful.

Some investors have long argued that the industry should eventually consolidate down to two East-West railroads crossing the United States alongside the two railroads that already cross Canada. But regulators have been skeptical and taken a cautious approach. Any proposed deal would face a lengthy STB review. That board is currently evenly split between two Republicans and two Democrats with one seat open.

Citi Research analyst Ariel Rosa said in a research note that a major transcontinental railroad merger ''would likely prove costly and time consuming, risking a years-long distraction to management, while facing significant pushback from regulators, politicians, employee unions, competitors, customers, and other stakeholders.''

Union Pacific, which is based in Omaha, Nebraska, generated $24.3 billion revenue last year as its more than 30.000 employees delivered freight all across the western United States. Norfolk Southern reported $12.1 billion revenue and has roughly 20,000 employees and its headquarters is in Atlanta.

Norfolk Southern stock gained 3.7% during the day Thursday and rose another 4.7% to hit $282.50 in after-market trading following the Journal's story.