Union Pacific Corp. (NYSE: UNP), announced on Tuesday a merger of historic proportions that valued each share in Norfolk Southern Corp. (NYSE: NSC) as $320, a huge increase over its prior close.
NSC’s shares fell today, indicating that investors are still cautious about the first mega-railroad consolidation since 1999.
On July 29, thTHESTREET, the stock of Norfolk Southern was impacted by skepticism about regulatory approval and labor resistance.
Norfolk Southern stocks sink on regulatory uncertainty
Investors have stayed away from NSC stock, despite the merger announcements. This is mainly because they are not convinced that $85 billion deal will pass regulatory review.
Surface Transportation Board, which supervises rail mergers and oversees Class I consolidations, is historically hostile to them.
Investors are worried that the NSC-UNP merger will be a similar attempt to the last major merger in this sector (Burlington Northern & Canadian National, 1999).
Markets are concerned that a prolonged delay or rejection of the merger could lead to a drop in premium value and expose Norfolk Southern’s shares.
NSC stocks remain under pressure due to the labour resistance
The rail industry’s biggest union, SMART Transport Division(SMART-TD), is threatening to challenge the regulatory framework.
SMART/TD have already indicated that they will oppose the Union Pacific/Norfolk Southern merger due to possible job losses, disruption of operations, and a weakened bargaining position.
In recent years, labor groups have become more vocal and their influence over regulatory outcomes has increased.
The approval process could be further complicated by a formal challenge, particularly if the hearings and public campaigns of opposition are triggered.
Investors have priced in the risk of union opposition delaying the merger, or forcing concessions which dilute the financial appeal. This adds another layer to the uncertainty surrounding the Norfolk Southern stock.
Is this concern overblown?
Donald Broughton believes that the concerns raised above may have been exaggerated, and that the Union Pacific and Norfolk Southern agreement will remove regulatory and labor-related obstacles.
He said in a CNBC Interview today that the financial issues, like the over-leveraged railroad balance sheets, which had previously prevented such deals, were now resolved.
Broughton said that the Union Pacific’s management team, in particular Jim Vena as its CEO, had a wealth of experience leading acquisitions and negotiating successfully with unions.
This classic merger arbitrage setup, which sees NSC’s shares trading well below their merger price of $277, offers a great opportunity to those who bet on NSC and UNP despite regulatory or labour issues in the near term.
Wall Street analysts have also given a “overweight rating” to shares of Norfolk Southern Corp., headquartered in Atlanta. This company pays a current dividend yield of 1.95 percent.
The post, Two major reasons why Norfolk Southern stocks closed lower despite Union Pacific Deal may change as new developments unfold.
