Trump Fires Rail Regulator. Investors Are Taking Note.

A Union Pacific freight train near Alamogordo, New Mexico. Union Pacific announced plans to merge with Norfolk Southern in late July. (Dreamstime)

President Donald Trump’s penchant for firing federal employees might have repercussions for railroad mergers. Investors are already responding.

On Wednesday, the president fired Surface Transportation Board member Robert Primus. The White House told The Wall Street Journal that “Robert Primus did not align with the President’s America First agenda,” adding “the Administration intends to nominate new, more qualified members to the Surface Transportation Board in short order.”

Primus plans to challenge the firing, the Journal reported. “No cause was given,” said Primus in a Thursday interview with CNBC, adding there was no prior conversation about job performance. “I have been pro-growth, pro-America since I’ve been [with the STB].” The two-sentence termination email came from the Office of Presidential Personnel.

The Surface Transportation Board is a federal agency that regulates railroads. It was created in 1996, replacing the Interstate Commerce Commission, which dated back to the 1800s, and has “jurisdiction over railroad rate, practice, and service issues and rail restructuring transactions, including mergers, line sales, line construction, and line abandonments.”

The STB can have five board members. It currently lists four on its website; Primus is listed as a former board member. Primus, whom the Journal described as a Democrat, was the only member of the board to oppose the 2023 merger of Canadian Pacific and Kansas City Southern.

That is relevant today because railroad M&A, notoriously difficult to navigate past regulators, is heating up. In July, Union Pacific and Norfolk Southern announced plans to merge, creating a truly transcontinental railroad.

That deal was part of the reason activist investors Ancora recently urged CSX to look for a merger partner, suggesting either Berkshire Hathaway subsidiary BNSF or a Canadian railroad. Ancora portfolio manager Jim Chadwick told Barron’s that CSX needs to act with more urgency, saying he believes the Trump administration would look favorably on mergers.

“I’ve said nothing publicly” about the merger,” added Primus, while noting that in the past he has been “very concerned with further [railroad] consolidation.” The potential for increased shipping costs and their impact on manufacturing from a more consolidated industry is something worth considering, he said.

In Thursday trading, Union Pacific stock rose 0.6% and Norfolk Southern shares gained 2.1%. The S&P 500 added 0.3% and the Dow Jones Industrial Average rose 0.2%.

CSX gained 0.4%, but stocks of the Canadian railways, seen as the potential buyers of the company, declined. Canadian Pacific Kansas City Southern was off 0.7% and Canadian National Railway fell 1.2%.

The Canadian railroads would likely need to pay a premium price for CSX investors to agree to the sale, and shares of acquiring companies often fall in response to merger news. Investors may worry whether an acquirer will receive a high enough return to justify a lofty purchase price.

They may also seek to take advantage when an acquiring company uses stock to buy shares. That can create an arbitrage opportunity where investors buy the company being purchased and sell the acquirer’s stock to lock in a spread.

Railroad mergers have worked in the past. Consolidation in the industry has led to stable prices and higher profit margins, but there hasn’t been a major rail merger in more than 25 years. Kansas City Southern, acquired by Canadian Pacific, was a smaller railroad, and it had a special merger exemption from the STB.

It is still very early in the current railroad drama. Investors can count on more merger news in the coming months.

Write to Al Root at allen.root@dowjones.com