In a surprise move Thursday, the Interstate Commerce Commission turned down the proposed merger of the Southern Pacific and the Atchison, Topeka & Santa Fe railroads.
The commission, in a 4-1 vote, rejected the railroad consolidation because, as one member said, the anti-competitive problems outweighed the benefits to the public. The action apparently will require the holding company that owns both railroads to sell one or both of them.
The only ICC member to vote in favor of the merger Thursday was Chairman Heather Gradison. The members gave no formal reasons for their votes, and the commission has until Oct. 20 to issue its ruling--and the reasons for it--in writing.
The Santa Fe Southern Pacific Corp., which owns both of the railroads but has been required to operate them separately pending action by the commission, may then appeal the decision in the federal courts.
The consolidated railroad system would have ranked as the nation’s second largest in terms of track mileage and gross revenue. (Burlington Northern is No. 1 in track mileage and CSX--a combination of the Chessie Systems and Seaboard Coast Line--is first in revenues.) It would have employed more workers (52,802) than any other American railroad.
Both railroads played an important part in California’s growth, drawing immigrants and industry to the state for decades after being founded in the 19th Century.
At an impromptu news conference after the 20-minute hearing of the commission in Washington, a stunned and angry John J. Schmidt, chairman of Santa Fe Southern Pacific, called the action “a horrible mistake” that would harm shippers in the Western and Southwestern United States. He conceded that “we are going to have to sell something,” adding that the railroads are “good properties” that would be attractive to buyers.
In a statement issued several hours later, Schmidt said, “We felt that the proposed merger provided a private enterprise solution to a problem faced by both the Southern Pacific Transportation Co. and the AT & SF.”
He added that the parent company will now concentrate on “how to redeploy our rail assets in a way that is in the best interests of our stockholders, our employees and our customers.” Because the denial was so “totally unexpected,” he said, “we had not developed an approved comprehensive plan for these rail assets.”
Some Operations Combined
In September, 1983, the Southern Pacific Co., California’s largest transportation company, announced that it planned to merge with Santa Fe Industries Inc. in a $4.9-billion deal. The merger was consummated three months later, although the two railroads continued to be operated separately. However, the new company, with nearly $6 billion in annual revenues and more than $11 billion in assets, combined the operations of its two predecessors in natural resources, forest products, real estate services and construction.
Even without the railroad combination, the combined company is a giant. It has more than 5,000 miles of pipelines, real estate and timberland holdings and mineral rights to more than 6.5 million acres of land. It is California’s largest private landowner.
In March, 1984, the new company asked the ICC for approval to merge the two railroads. Several other railroads, although they did not oppose the merger, filed requests with the ICC to obtain track rights and other concessions as conditions of the merger.
Didn’t Wait for Staff
The ICC ordered that the operations of the railroads remain separate and competitive while it conducted its review. Al Brown, an ICC spokesman, said the commission banned the merger before receiving any formal recommendation on the issue from its staff.
However, the Associated Press quoted Donald Shaw, acting director of the ICC’s rail section, as saying that the commission staff favored the merger, although with some conditions that he said the staff believed would solve the competition problem.
The stock of Santa Fe Southern Pacific Corp. was the most actively traded Thursday on the New York Stock Exchange. A total of 3.8 million shares changed hands and the stock closed at $28, down $2.25.
Analysts generally disagreed with the decision. “I’m aghast,” said Joseph B. Muldoon, railroad analyst with the Philadelphia brokerage firm of Janney Montgomery Scott. “Here we have one railroad, Southern Pacific, that is . . . marginal (in terms of profitability), merging with another railroad, Santa Fe, that in recent years has not been all that profitable.
“This was a natural merger (in which) you could have abandoned several thousand miles of track and concentrated on the more direct routes and provided improved service to the shipper. I think it is a negative for the two railroads. I’m not going to predict bankruptcy for either one, but I think that both will be in a continual marginal status.”
Andras R. Petery, an analyst with Morgan Stanley & Co., a New York brokerage house, said, “It is a real setback for shareholders and a setback for the corporate strategy of Santa Fe Southern Pacific Corp. These railroads represent excess capacity. . . . There is too much railroad and not enough freight.”
Firm Has Four Options
But some analysts lauded the ICC’s rejection of the merger.
“There are four options open to Santa Fe Southern Pacific Corp.,” said George O. Zimmerman, an analyst with Gruntal & Co., a New York stock brokerage firm. “They can appeal. They can spin off Southern Pacific Railroad to the present stockholders of Santa Fe (by distributing shares in the new entity on a pro rata basis). They can sell Southern Pacific. They can sell both the Southern Pacific and the Santa Fe transportation companies.
“I believe that the third option is most likely to occur. That sale would bring in over $2 billion. Remember, no cash was paid for this railroad. They didn’t pay a dime. It was acquired through a pooling of interest, an exchange of stock.”
E. Magnus Oppenheim, president of E. Magnus Oppenheim, a New York investment company, said the book value of the two railroads is $3.2 billion. If they are sold, he said, “it will make (the parent firm) very rich, rich enough to acquire other companies and go into other businesses and do something more profitable with a greater future.”
He predicted that the ICC decision would not be appealed because “these people have spent 2 1/2 years pushing for (approval of the merger).”
Issue of Competition
The proposed merger had already been approved by the Department of Transportation, which had said that the marriage of the two systems would not threaten competition except in a small and “geographically dispersed” part of the two railroads’ combined freight business. The department had urged the ICC to let the two railroads conclude the merger and then devise ways to ensure that competition was preserved in the few markets in which it would be threatened.
The Justice Department, on the other hand, strongly opposed the merger on grounds that it would eliminate or substantially reduce competition in many parts of the country.