Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: FRIDAY, August 4, 1995 TAG: 9508040043
SECTION: BUSINESS PAGE: A7 EDITION: METRO
SOURCE: BLOOMBERG BUSINESS NEWS
DATELINE: BETHLEHAM, PA. LENGTH: Medium
Union Pacific Corp. said it will buy Southern Pacific Rail Corp. for $5.4 billion, or $25 a share, creating the largest railroad in North America.
If approved, the merger would create a 34,000-mile railroad serving 25 states, Mexico and Canada. The companies had combined 1994 revenue of $9.54 billion.
The combination is the third mega-merger announced in the past four days, following Walt Disney Co.'s acquisition of Capital Cities/ABC Inc. and Westinghouse Electric Corp.'s purchase of CBS Inc. Altogether, mergers worth more than $30 billion were announced this week.
The Union Pacific-Southern Pacific merger could result in higher prices for shippers but would make it easier to move goods among the Midwest, California, the Gulf Coast and Mexico, analysts said.
``What I see going on in the Western railroad industry is tremendously beneficial to the companies and to the shippers,'' said James Higgins, an analyst at Donaldson Lufkin & Jenrette. ``You're going to see larger, more extensive systems with better quality.''
Norfolk Southern Corp. termed earlier reports of the merger as "nothing new." In light of a recent merger between the Burlington Northern Corp. and Santa Fe-Pacific Corp., NS watches with interest any time reports of other mergers surface, said Bob Fort, spokesman for the Norfolk-based railroad.
Under the terms of the transaction, Bethlehem, Pa.-based Union Pacific next week will begin a cash tender offer for as much as 25 percent of Southern Pacific's stock.
The shares purchased in that tender offer will be placed in a voting trust, a mechanism to protect shareholders if the Interstate Commerce Commission rejects the merger.
If the transaction goes through, each remaining share of San Francisco-based Southern Pacific stock then will be converted into the right to receive $25 in cash or 0.4065 share of Union Pacific stock.
Union Pacific will pay about $4 billion for the existing shares of Southern Pacific stock and will also assume about $1.4 billion of Southern Pacific's debt.
The boards of both companies approved the transaction Thursday, and they expect to reach a final agreement soon, they said. The railroads expect to apply for ICC approval by Dec. 1.
Southern Pacific's stock rose $2.371/2 to $22 a share Thursday in trading almost eight times its daily average after reports that a takeover was imminent. Union Pacific's shares rose 621/2 cents a share to $65.
Union Pacific Chairman Drew Lewis said the combination would result in efficiencies and increased traffic worth about $500 million a year.
``The combined system will be able to offer new services that neither Union Pacific nor Southern Pacific can offer on its own,'' he said.
The merger would link Union Pacific's strong presence in the Midwest to Southern Pacific's California routes, which run north and south. It is sure to face antitrust scrutiny. The ICC likely will force Union Pacific to sell some tracks or arrange sharing agreements with other rails.
Both rails have routes that ring the Gulf Coast, serving petrochemical plants across Louisiana and Texas, and observers say that likely will face keen scrutiny.
``There's slim chance they can hold on to that,'' Higgins said.
In addition, Union Pacific and Southern Pacific run almost parallel tracks between the San Francisco Bay area and Salt Lake City.
The ICC has grown increasingly pro-business in recent months, even speeding up the timetable in which it rules on railroad mergers. The agency cut the review time to six months from more than 21/2 years.
That change helped Fort Worth, Texas-based Burlington Northern buy Santa Fe Pacific Corp. earlier this year after a bitter bidding contest in which Burlington Northern beat out Union Pacific's hostile takeover attempt, ultimately paying $4 billion for the Schaumburg, Ill.-based railroad.
Staff writer Greg Edwards contributed to this story.
\ BIGGEST U.S. RAILROADS
Ranked by 1994 revenues
Union Pacific-Southern Pacific, $12.41 billion
CSX, $9.61 billion
Burlington Northern (including Santa Fe), $7.95 billion
Norfolk Southern, $4.58 billion
Conrail, $3.73 billion
Kansas City Southern, $1.1 billion
-Associated Press
by CNB