Berkshire Hathaway Deal for CSX Looks More Likely After Blockbuster Norfolk Southern-Union Pacific Railroad Merger

(Megan Varner/Bloomberg)

The ball is in Berkshire Hathaway CEO Warren Buffett’s court after Union Pacific reached a deal Tuesday to buy Norfolk Southern for $85 billion to create the first transcontinental railroad.

The blockbuster deal raises the odds that Buffett’s Berkshire Hathaway, which owns the Burlington Northern Santa Fe railroad, will reach a deal with CSX to create a second transcontinental railroad. Union Pacific and BNSF compete in the western U.S., while CSX and Norfolk Southern are the two big Eastern railroads.

There are strong competitive reasons for Berkshire to act. Union Pacific and Norfolk Southern highlighted the benefits t o shippers from their combination, including cross-country shipping that could be one to two days faster—which would make railroads more competitive with trucking.

In a client note last week, J.P. Morgan transportation analysts led by Brian Ossenbeck wrote that “it is broadly assumed that BNSF could not compete stand-alone if UP/NS merged.” Ossenbeck based that view on industry contacts.

A deal for CSX would cost about $80 billion, assuming a price of about $41 a share, or 25% above where the stock traded when The Wall Street Journal reported news of the Union Pacific-Norfolk Southern talks earlier this month. Add debt and the deal would total nearly $100 billion—which would be more than the Norfolk Southern transaction value of $85 billion including debt.

CSX stock was little changed on Tuesday, with shares at $35.69. This indicates that investors are taking a wait-and-see approach to a potential deal for CSX, whose stock is up about 7% since news of the Union Pacific-Norfolk Southern talks broke. Even if a deal were reached soon, CSX stock could trade at a 10% discount to the deal price, due to what could be 18 months until a potential closing and extensive regulatory review. Norfolk Southern stock was down 1.7% to $281 Tuesday, and trades about 10% below the current value of the Union Pacific offer due to regulatory uncertainty and a projected closing date that is about 18 months away.

A deal for CSX would be an elephant-sized transaction long sought by Buffett. Berkshire is sitting on over $330 billion of cash after selling more than $100 billion of Apple stock last year. Berkshire’s class A stock was up 0.6% to $726,156 Tuesday morning. Investors probably would react favorably to a Berkshire deal for CSX, given that there has been some frustration among investors that Berkshire has built so much cash. Many have also assumed that Buffett, 94, wouldn’t invest a chunk of that cash soon.

Buffett will likely make the choice whether to pursue CSX in conjunction with Greg Abel, a Berkshire executive who will take over as CEO at year-end, and BNSF’s management*.* Ossenbeck wrote last week that conviction is low among his industry contacts about BNSF’s next move.

A spokeswoman for Abel told Barron’s earlier in July that he would have no comment, and there was no immediate comment Tuesday. There also was no immediate comment from Berkshire.

CFRA analyst Cathy Seifert said recently that Buffett is not one to “chase a deal.” However, Berkshire may decide that it has no choice but to protect its investment in BNSF—which is likely worth over $100 billion and is one of the three main Berkshire units, along with insurance and utilities.

Buffett also is price-conscious. He has a history of not paying more than 15 times after-tax earnings for a business or stock: Such was the case with Berkshire’s deal for BNSF in 2010, as well as Berkshire’s purchases of Coca-Cola stock in the 1980s and Apple a decade ago.

CSX now trades at about 20 times estimated 2026 earnings—and Berkshire might have to pay close to 25 times earnings to get a deal done. Even at that price, the deal would be 8% accretive to Berkshire’s 2026 earnings, according to UBS analyst Brian Meredith. That assumes synergies of about 4% of combined revenues.

Berkshire presumably would pay cash for CSX if it reaches a deal, since the company has so much of it. Berkshire has about $90 billion of cash at its holding company and thus wouldn’t need to tap cash at its insurance units, where there could be insurance regulatory scrutiny. Union Pacific doesn’t have that kind of a balance sheet and is paying for its deal with about 72% equity.

If Berkshire does act, it may do so without the help of investment bankers, and there may not be any news leaks of any talks since there usually haven’t been any in the past with Berkshire deals.

The odds are rising of a Berkshire deal for CSX, but the ultimate decision will be up to Buffett—and he’s not easy to read.

Write to Andrew Bary at andrew.bary@barrons.com