UNP: Give a Little, Get a Lot

Research evidence excerpt

UNP: Give a Little, Get a Lot

Union Pacific Corporation Equity Research

Pulling Value Forward

While the market's focus remains fixed on the regulatory process, we believe the investment case

increasingly hinges on a much broader set of factors. UP's upcoming regulatory response could serve

as an important catalyst by demonstrating a willingness to work constructively with regulators.

Combined with improving fundamentals, this could bring sidelined capital back into the stock and allow

investors to pull forward a portion of the merger's long-term value realization ahead of any final STB

decision.

The key question in our view is not whether concessions will be required, but how much value is created

after the regulatory threshold is satisfied and where the true economic walkaway point ultimately

resides. As we evaluate a range of concession outcomes, we continue to find meaningful value creation

well beyond UP's $750m threshold. Although concessions exceeding that level would diminish returns,

we don't believe elevated levels will be required and the magnitude of the synergy opportunity,

combined with the potential to normalize NS's operating performance, provides sufficient cushion for

the transaction to remain nicely value accretive in our view.

Estimating the Bid-Ask Spread

Since the merger was filed, we have viewed Union Pacific's application as an offer rather than a final

reflection of the terms required for approval. While it remains far too early to precisely define the

negotiation range, responses from competing railroads, shippers, and other stakeholders are beginning

to identify the areas most likely to attract regulatory scrutiny. The company's initial response to

the STB's abeyance request demonstrated a willingness to divest several limited but symbolically