Union Pacific will walk away from its proposed acquisition of Norfolk Southern if federal regulators order widespread trackage rights or line sales as part of their approval of the $85 billion deal.
The only exception: If the combined railroad is required to spin off one of its duplicative main lines between Kansas City and St. Louis. If the merger is approved, UP would have a pair of K.C.-St. Louis routes, including its former Missouri Pacific via Jefferson City, Mo., and NS’ former Wabash via Moberly, Mo.
The information from the railroads’ merger agreement was disclosed on Thursday in the revised merger application they filed with the Surface Transportation Board. The consolidation if approved would create a transcontinental rail colossus with more than 52,000 miles of track in 43 states.
UP (NYSE: UNP) would be willing to accept overhead trackage rights allowing a rival Class I railroad to serve shippers and short lines that would see their post-merger rail options drop from two carriers to one or three carriers to two.
The merger application identifies five 2-to-1 customer locations and four 3-to-2 customer sites, all in Illinois. Not all of the locations currently use rail service, however, and UP has offered affected customers the ability to receive service from another Class I railroad.
Otherwise UP will not grant other railroads wide access to its or NS’ (NYSE: NSC) routes via line sales, trackage rights, or haulage rights. And aside from K.C.-St. Louis, any line sale required as part of regulatory approval of the deal is an automatic condition that would allow UP to scuttle the merger.
UP also won’t accept a general proportional rate obligation. It has agreed only to proportional revenue rate agreements, now dubbed its Committed Gateway Pricing program, for manifest carload traffic interchanged through Chicago, St. Louis, Memphis, or New Orleans.
Under the merger agreement there is no freestanding right for UP to terminate the deal the moment the STB announces an unacceptable condition. UP has no obligation to close if such a condition is imposed, but it cannot immediately walk away, either.
UP could accept a minor reciprocal switching obligation or a small divestiture and still stay in the deal, as long as the total impact of board-imposed conditions stays under a $750 million threshold. Anything over that amount triggers a review.
If burdensome conditions prompt UP to walk away, it will have to pay NS a $2.5 billion breakup fee.
Either railroad can terminate the deal if it isn’t closed by Jan. 28, 2028 or if the Surface Transportation Board or a court issues a final decision blocking the merger. The end date automatically extends, however, if the STB adds time to its review clock.
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