Union Pacific Nears Norfolk Deal to Create $200 Billion Railroad

0:00When your options are limited, so are your opportunities. At SIBO, the global exchange that pioneered options trading, we offer more ways to move with the market. From VIX and SPX options to global market data solutions, SIBO helps investors diversify, manage risk, and stay ahead of whatever the market does next. SIBO. Life is better with options. Your investments could be too. There are risks associated with SIBO Company products. Review the disclosures and disclaimers at SIBO.com slash US underscore disclaimers. Some people treat ChatGPT like some kind of smart search engine, and some use it to get work done.

0:36ChatGPT Work is a new way of working in ChatGPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful. Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChatGPT.com by selecting Work Mode, available on Plus and Pro plans. Healthcare doesn't always work great.

1:14If you've ever waited on a refill or couldn't schedule an appointment, you get it. That's the kind of stuff Optum is changing. They're using data and technology to integrate patient care, pharmacy, and everything else. So healthcare is connected, not complicated. What's that look like? Cheaper prescriptions that are easier to get and care that looks at the whole person. How you need it. Optum is helping make healthcare work as one for everyone. Learn more at business.optum.com. Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m.

1:56Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. All right. I've been following the railroad stocks, folks. That's where I started my career covering the railroad stocks. Here's a headline I never thought I'd see. And that's like 1986. Union Pacific, Northern Southern in advanced talks. I never thought I'd see that. Lee Clasgow, Senior Transport Analyst for Bloomberg Intelligence. Lee, putting a Western Railroad, Union Pacific, together with an Eastern Railroad, Norfolk Southern, creating a East to West True Railroad.

2:33Can that happen? Will the regulators allow that to happen? I mean, it's possible, given where the surface transportation rules are now as it relates to large acquisitions. acquisitions, we give it a relatively low probability, maybe 25, 35 percent chance of happening. The STB is actually in August reviewing some of its rules to streamline some of the processes that it deals with. But it's not impossible. But again, we think that the probability is below 50 percent. If it were to happen, it would create the first transcon railroad and that could be good it could be good because a rail car would be touched less because it would wouldn't have to maybe enter be interchanged with other railroads and that does you know the more time a rail car is touched the more times something could go wrong and so that would would would probably reduce you I would have to say it probably could reduce some some accidents It could also reduce costs for the railroads in general.

3:44So it could be a good thing. Shippers might have an issue with it because they might be afraid, even though that Norfolk Southern Union Pacific don't necessarily compete against each other directly, they might be concerned that losing one of the large Class 1 rails would result in less competition. And the railroads for the STB hurdle have to prove that this deal is in the public interest. So, you know, you're going to have a lot of constituent stakeholders voice their opinions both for the deal and against the deal. And, again, that's all assuming that these two parties can come to an agreement.

4:22You know, we put out a note last week where we thought, you know, the enterprise value for that transaction could be in the high 80, 80 billion. So we'll see, you know, what kind of deal the two can hammer out. All right, you're kind of going along the track that I was thinking of. I'm on the track. I get it. Oh, I like that. A little railroad humor. Railroad humor. Can you go more into the regulations? Because you started talking about that, but what are some more of those sticking points that could cause this maybe not to go through? Well, you know, we've seen a couple large mergers. The last large one was Canadian Pacific and Kansas City Southern.

5:03Kansas City Southern was the smallest class one railroad and they were exempt from these new rules that went to an effect in 2001 and the rules kind of came about because Burlington Northern and Canadian National were looking to merge and so even though they had a lower bar it took quite some time for the deal to close I think it was about 18 months you know we suspect that under the current rules a deal between Union Pacific and Norfolk Southern could take about two years to get SDP approval. So it's going to be a long process. So even if the two come out tomorrow and say, hey, we're doing a deal and the shareholders approve it, this could be two years until we see an actual Transcon Railroad.

5:49So, Lee, I'm going to go get my floppy disk out circa 1988. I got my Union Pacific and my Norfolk Southern earnings models there. I'm going to put them together like they're merging what cost do i take out what are the synergies do you think what's the reason for doing this deal so it's pretty interesting so you know norfolk southern uh went through its old cost cutting process as it started to embrace precision scheduling railroading for for those that aren't familiar with it it's pretty much six sigma for the rail industry so it's just about sweating assets uh and they laid off people uh and so you know it's not like there's a lot of fat there.

6:26But what I suspect is that they may be laying off some people in corporate because you don't need two CEOs, you don't need two CFOs, you don't need necessarily as many salespeople and accountants. So there's that aspect of it. And also, if they are able to provide a lower cost service, they might be able to, even though they can raise rates, provide it at a lower cost to shippers. So I think that's going to be the big, what can they do for shippers, is can they lower the cost curve because of the fact that, again, the rail car is being touched less, and are they able to pass that on to shippers?

7:10I think if they can make a case for that, they'll have an easier time of getting a deal done. All right, Lee, in the last 20 seconds, second quarter results, anything stand out? Union Pacific has done really well. Their network is operating well. They had some issues during the pandemic. That seems well behind it. Their goal is to have the lowest operating ratio, which is an inverse to an EBIT margin, so the lower the better. And it seems like they're going to deliver on that. Lee, thanks so much for joining us. Really appreciate it. This could be a really cool time in the railroad industry. if you can get an east-west railroad for the first time in the United States.

7:50Lee Clasgow, Senior Transport Analyst for Bloomberg Intelligence. Again, the news for us railroad geeks. Union Pacific, Norfolk, Southern, in advanced talks. I mean, if you're in advanced talks, you must have some lawyers somewhere telling you, yeah, we can pass this. We can get this past the regulators. I don't know how that... But two years he's at... Oh, yeah. Oh, boy. These are railroad people. They're not like the fastest out there. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App.

8:21Listen on demand wherever you get your podcasts or watch us live on YouTube. You're listening to Bloomberg Intelligence. I'm Lisa Mateo alongside Paul Sweeney. And let's get to Tesla, right? It posted one of its worst quarters in years, revenue falling 12 percent. And there could be even more tough times ahead. So let's find out more. Dig into this with Steve Mann. He's Bloomberg Intelligence Global Autos and Industrials Research Manager. Steve, why don't you start out with telling us what the biggest portion of that revenue drop, where did it come from? Well, the revenue drop was mainly from weaker sales in Europe, still the Model Y ramping up.

8:57I think on the call, I think the reason why the stock is down the most is really the outlook. Nothing earth-shattering from the outlook. and they were kind of cautious about the rest of the year and maybe into the 2026. Steve, what do we know about the position of the Tesla brand right now? And is it something that can be, to the extent it's been harmed, say, in Europe, where they have seen some weakness? Can it be repaired? What's the feeling? It's tough. It's going to take time. I think it would be really helpful if Elon Musk kind of stay away from the politics for the moment and really focus on the business and marketing its vehicles.

9:48It is a nice vehicle, Model Y. The man has picked back up after the changeover earlier this year. The volume is not there yet, but the issue here is they've just launched a new vehicle. but the 7 ,500 tax credit in the U.S. is going away. So the trajectory, the growth trajectory for that new vehicle and gross margin has been derailed. And look, we're actually looking for 2025 deliveries to be about 5 % lower than what consensus is saying at 1.57. So, and we're probably going to see, you know, the revision on consensus deliveries in 2026 by another 5%. So, it's going to be some tough time for the automaker.

10:42I mean, the one couple bright spot that could offset, it's going to be, you know, the extended version of the Model Y in China. You know, longer vehicles, more space in the back seat does help sales over there. and there's you know there's a new cheaper vehicle that they're supposed to launch in the second half so hopefully that could offset but you know execution is key execution is key yeah people were waiting to hear more about that affordable vehicle so speaking of which is Tesla is it an auto business is it an AI robotics company is it a tech company like what is Tesla and could we possibly see it maybe even break up like some of these bigger companies have oh I I think it's a combination.

11:26I don't think they're going to break that up. You know, Elon Musk and Tesla is very focused on physical AI, you know, very different than the LLMs that you hear from Google. You know, they're actually, you know, building robots, robots on wheels and humanoid robots with Optimus. So it's quite different. You know, for them to actually build out physical AI, they do need the hardware. they need to continue to build cars, right? And cars is a critical component of their success, especially even in early days of autonomy. It's still a cash generator for them, even though free cash flow has dropped, but it's still an important business for them to generate cash, invest in physical AI.

12:19So I don't see that breaking apart. it's you know it's a critical component of their entire business I don't know Steve I'm putting on my banker hat I said I spin out that car company who cares let's focus on all the other stuff that he seems to be all fired up about but Steve talk to us about tariffs here looks like one of the key aspects of the Japan deal as we know is maybe the autos coming in from Japan will have only a a 15 % tariff on that. What do the U.S. automakers think about that? Well, I think it's good news. You can see, you know, GM, when they announced their earnings, it was down, I think, 8, 9%, and then it kind of recovered a lot of that yesterday on the back of the announcement that U.S.

13:04and Japan had come to terms on a trade deal. and what it means is 15%, at least 15 % tariff. Look, GM has a lot of, you know, some of the most popular vehicles coming from Korea and the hopes is that, you know, Korea and U.S. can make the same deal. But look, it's far from over, okay? What Tesla talked about yesterday and how the tariffs are going to impact their sales, is not the impact is not just on them is for the whole US auto industry don't forget right next year the USMCA the US Mexico and Canada trade free trade agreement comes up for renegotiation in 2026 and you know the automakers here depend on that trade agreement significantly to to to lower costs so I I wouldn't be surprised if Trump comes in and wants to kind of tear that apart and renegotiate the whole thing.

14:10There's a lot of uncertainty around that, and we don't have a lot of visibility. So the whole tariff story is not over yet. So, Steve, Musk also voiced some concerns on the call about the size of his stake in the company, suggesting it should be larger. I mean, how did investors take that statement? Well, there's been a lot of back and forth between Tesla and the courts on Elon Musk's pay package. Essentially, he's not getting paid for what he's doing for the company as much as he deserves. So I think there's a point, there's a strong argument for him getting paid. But we'll see. There's a shareholder meeting coming up.

14:58And I think the shareholders will revote on this issue. And hopefully he gets paid for his contribution for the company. All right, Steve, thanks so much. Appreciate that. Steve Mann, Global Autos and Industrials Research Channels for Bloomberg Intelligence, joining us from Princeton. When your options are limited, so are your opportunities. At SIBO, the global exchange that pioneered options trading, we offer more ways to move with the market. From VIX and SPX options to global market data solutions, SIBO helps investors diversify, manage risk, and stay ahead of whatever the market does next.

15:36SIBO. Life is better with options. Your investments could be too. There are risks associated with SIBO company products. Review the disclosures and disclaimers at SIBO.com slash US underscore disclaimers. Some people treat ChatGPT like some kind of smart search engine, and some use it to get work done. ChatGPT Work is a new way of working in ChatGPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful.

16:18Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChachiPT.com by selecting Work Mode, available on Plus and Pro plans. It's time to plan ahead and make sure your brand is showing up in ways that can have an impact. That's where 4imprint comes in. 4imprint have promotional products that work as hard as you do. Durable, useful, and designed to make a lasting impression. Think quality apparel your team will wear again and again, including popular and exclusive brands. Drinkware that's enjoyed again and again. Bags, notebooks, tools, and tech items that don't just look good, but actually get used.

16:57With thousands of customizable options, 4imprint makes it easy to find what fits your brand and your budget. You'll get expert help, free samples, and their 360-degree guarantee means you can be 4imprint certain your order shows up just right, right on time. Whether you're gearing up for fall events or simply planning ahead for the season, 4imprint can help your brand show up, stay useful, and make connections that last. Explore the possibilities at 4imprint.com. 4imprint, 4certain. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App.

17:35Listen on demand wherever you get your podcasts or watch us live on YouTube. All right, I'm looking at some airline earnings here today and the stocks are not reacting well. I'm looking at America Airlines. That stock is trading down. Love, which is Southwest, that is also trading down. There's definitely some concerns out there about the consumer and flights and demand and all that kind of stuff on the airline front. Sid Phillip joins us, Deputy Team Leader for Global Aviation. Sid, what are you seeing from American and Southwest? Is there a theme out there? The theme seems to be that there isn't as much bullishness about the recovery that United Airlines and Delta Airlines pointed out last week.

18:12So they're sort of more cautious about the outlook and they're talking about how they're still having to discount, they're still having to sort of offer incentives, which is crazy in the sort of the busy summer season. And summers, typically when airlines tend to make most of their money, there very rarely, if ever, are discounts on travel. And so it does seem to be pointing towards a sort of consumer recovery, still being in the holding pattern rather than sort of out there and everyone sort of back to spending as much. Can you talk about the difference with American being more exposed to the domestic market?

18:48So American Airlines typically has a lot of flights in the U.S. I mean, they have a much larger presence in the U.S. versus Delta and United, which have more international offerings. And also, I mean, we heard from American CEOs saying that business travel isn't yet back as much as they expected it to be. And that's in contrast to what Ed Bastian of Delta talked about last week, where he said business travel is beginning to take off again. So we're seeing contrasting images from the sort of American and Southwest. I mean, Southwest is a leisure carrier, and they're in the midst of adding more fees, they're adding more in terms of offering basic economy, they're starting to charge for check baggage, they've started to sell seats.

19:30And so they're in a bit of a different situation, but American Airlines, I mean, their bread and butter is flying people around the Americas, and that is sort of still a big question mark as to where that recovery is at the moment and whether it'll hold up, especially the green shoots that they've been talking about. Southwest Airlines stock really seeing some red here at down 11 percent here. Symbol is LUV, love for Love Field, which is their main airport when they started. Southwest, they called out a billion dollars from tariff fallout. Where did that number come from? What's that represent?

20:06So they offered a 1.7 billion EBIT target at the start of the year. That's what they expected to make in 2025. And now they've sort of reinstated an estimate for the year. They expect between$600 million and$800 million in EBIT. And they're saying that the decline in that estimate that they had from the start of the year to now, that's the impact of the macro conditions. Because I'm trying to think tariffs, I guess tariff on repair parts or something like that. Or is it just the uncertainty created by tariffs? They're ascribing that. Exactly. They're talking about the macro environment. Are people buying that, do you think?

20:43They are to some extent. I mean, there has been a slump in travel. I mean, immediately after the tariffs were announced and the whole trade wars and everything else, people did start pulling back on spending. People stopped buying holidays because they sort of are more concerned about their economic certainty. And that seems to be the trend that's continuing at the moment where people are still not quite sure if they're going to have the money that they need to spend on holidays. And that's really where Southwest Airlines is sort of seeing a big hole in its finances because they need people to go on holiday in order to be able to actually make money.

21:20Yeah, no kidding. So did they see, I'm kind of going through the story, I didn't see anything about them gaining passengers from all those air traffic control issues with United's hub over at Newark. Was there anything that they talked about that? They didn't talk about Newark. And, I mean, obviously, United Airlines had a big impact from the Newark fallout. But typically, given the fact that Newark's a big international hub for United Airlines and Southwest Airlines typically flies within the U.S. and within the Americas, that business might have gone on to other carriers who operate from Newark as well, New York airports.

21:56Yeah, I've been flying out of Newark my entire life. And I'll tell you what, it was a dump. But Terminal A. That's nice. That renovation is awesome. I mean, and if they can do to the other terminals what they did to terminal A, then we got something there. So I'll stick up for Newark Airport at EWR anytime. More or less, it's been generally OK. Although they tend to, when you land, you tend to sit on the tarmac waiting for a gate. That really bums me out. I let everybody know about it. All right, Sid, thanks so much for joining us. Sid Phillips, deputy team leader for Global Aviation here at Bloomberg News.

22:29Joining us live here in our Bloomberg Interactive Broker Studio. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Elise Mateo, Paul Sweeney live here in our Bloomberg Interactive Broker Studio streaming live on YouTube as well. Alphabet, I think that's Google. I can't remember. They reported some numbers last night after the close. I thought they were really good. Stock's up a couple of percent. Some people are bummed because they took up their CapEx number a lot.

23:03I view that as a positive. I don't know, because I think they're spending money to make money. It's one of those things. Mandeep Singh joins us here. He covers all the technology stuff for Bloomberg Intelligence. Mandeep, what was your takeaway from the Google results? I mean, the fact that they are able to grow their search business double digit at that kind of run rate,$210 billion plus. Like, think of how many incremental dollars they added just by virtue of that 11 % growth in their$210 billion business. And that is where, you know, the real strength lies with a company like Alphabet. They are overlaying Gemini across their family of apps.

23:47AI Overviews is actually driving 10 % more queries. And AI Overviews is now used by 2 billion monthly active users. So Google Search has 5 billion monthly active users. Imagine AI Overviews being used by 2 billion monthly active users. So they got the UI part right. Gemini as a standalone app has got 450 million monthly active users. Imagine if everyone started paying a$20 subscription like ChatGPT. This could become a$100 billion business. business in addition to search. And then YouTube, I'm not even talking about, you know, all the strength in YouTube and Waymo. So this is a powerhouse when it comes to$400 billion run rate, they will be at the end of the year.

24:34So can you explain something to me? Because when the shares dropped, because they said CapEx was a little bit more, well,$10 billion more than expected, a little bit. How is that different for an alphabet versus if Meta were to say that? So that's great. So look, let's frame the CapEx. $85 billion at potentially a$400 billion revenue run rate by the end of the year. That's like a 25 % CapEx intensity. Meta, on the other hand, is already at a 40 % CapEx intensity because their CapEx will be$70 billion at a run rate of close to$200 billion. So that just goes to show Alphabet is still far lower than their peer group when it comes to the CapEx intensity.

25:17I mean, that's just the scale of the business that they are operating. And look, I do think the ROI on their CapEx is higher because Gemini's cost is much lower than all the other large bandwidth models, including Microsoft, including Meta. They do inferencing at a lower cost. And that's the advantage of having your own chip. having your own large Android model that Microsoft or Meta don't have because they rely on NVIDIA chips, whereas Google does most of their inferencing from the TPU chips. So I think that just vertical integration they have, Alphabet has, gives them such a big cost advantage when it comes to running the AI infrastructure.

25:59Where's the company on the various regulatory issues outstanding? What are the one or two or three ones that we really got to focus on? And what's the market telling us? So that's the biggest risk with Alphabet. That has been the biggest drag on their multiple, and it remains because we have a catalyst next month where Judge Mehta is going to make a decision on the remedies. And, you know, especially that chrome split, that's still an overhang. Now, the base case is there won't be any chrome divestiture, but we still need to learn about what are the remedies that may come about in terms of, you know, proposed by the judge.

26:36And And that is where if they are asked to, you know, share search data or some other type of remedy that's going to hurt their position. I think that is the big overhand. Boy, this one could be, this one, if you have a firm view on that, you buy the stock here and there's a ton in this thing. Given what I just saw last night on the earnings, are people doing that? Are people making bets here? I bet you they have to be. I mean, the narrative is still so negative. Dave, everyone is fixated on, oh, chat GPT, my workflow is changing. Bobby Axelrod on billions would somehow figure out where this judge is going to rule and make a bet one way or the other.

27:14You know there's the Bobby Axelrods of the world. I agree. I think if you can figure out decisively what the judge's verdict is going to be, the multiple wise, you could see easily a 25 to 30 percent multiple expansion and numbers will go up for sure after print last night. but multiple expansion is like 25 to 30 % just on that. And when is that ruling? That's coming up in August, September timeframe. Yeah. It's hard to keep up with these things. I don't know how you do it, Mandy. That's why we got Mandy. That's why we have them. Mandy's got like a huge team, global team behind him. I mean, all he does is come on radio and TV.