ICC Refuses to Reverse Ban on SP-Santa Fe Rail Merger; Selloff Ordered : Agency Gives Holding Company 90 Days to Submit Plan to Divest One or Both Lines Within 2 Years

The Interstate Commerce Commission declined Tuesday to reverse its disapproval of the merger of the Southern Pacific and Santa Fe railroads and gave the holding company that owns both lines 90 days to submit a plan to sell one or both of them within two years.

The 4-to-1 vote by the commission took place in a crowded, hushed hearing room in Washington. Within 30 days, the ICC must release a written report formally outlining the reasons for its rejection, but it was clear Tuesday that the commission majority continued to believe that the merger would have been anti-competitive.

Officials of the Chicago-based holding company, Santa Fe Southern Pacific Corp., said they would not fight the ICC ruling.

“Naturally we are disappointed with the decision by the commission,” Chairman and Chief Executive John S. Reed said in a statement issued immediately after the vote.

“We had believed that the commission’s original objections had been satisfied,” Reed said. “While it is possible to appeal the decision in the court, we believe the employees of these two railroads have been held in suspense long enough, and I will not recommend that we pursue that possibility.”

The action, which confirmed a decision the ICC made last July, raises the question of whether the holding company will sell one of the railroads or both. However, the firm made clear Tuesday that there will be a realignment of the rest of its operations and that some subsidiaries already are up for sale.

Reed said the businesses on the block include Robert E. McKee, a general contractor headquartered in Dallas; Barker’s Leasing & Financial Corp., which specializes in equipment leases; Santa Fe Pacific Timber Co., which owns about 520,000 acres of timberland in Northern California, and Gulf Central Pipeline Co., which transports anhydrous ammonia from the Gulf Coast to the Midwest.

The chairman said the company is studying various options concerning the two railroads to determine what is in the best interests of shareholders, employees and the railroads themselves. The company said it expects to meet the ICC deadline and will announce its plan at the “appropriate time.”

Santa Fe Southern Pacific had hoped that an agreement it reached earlier this year with Union Pacific Railroad, the major competitor to oppose the merger, would resolve the commission’s concerns that the combination would weaken railroad competition in the West.

Santa Fe Southern Pacific agreed to grant Union Pacific the right to use some of the track of its two railroad subsidiaries. In exchange, Union Pacific agreed to cooperate in the effort to persuade the ICC to change its mind and approve the Southern Pacific-Santa Fe merger. Santa Fe Southern also would have gotten access to some of Union Pacific’s trackage.

Despite the agreement, however, Malcolm M. B. Sterrett, one of the commissioners who voted against the merger, said Tuesday that anti-competitive concerns remain. Commissioner J. J. Simmons III said he voted against the merger again because it would have constituted a “radical restructuring” of the railroad system in the West. ICC Vice Chairman Paul H. Lamboley said there had been no new evidence that any circumstances had changed since last July and thus there was no reason to reopen the case.

The only member to vote in favor of the reversal--taking the same position she took last July--was Chairman Heather Gradison. She said she believes that the reopening was denied not because the proposed merger was a bad idea, but because the commissioners believe there may be a better railroad combination in the offing.

However, she said it is not up to the ICC to find the perfect merger or to determine whether a proposal is the best one possible.

The ICC’s original action last July took the industry by surprise and went against the recommendation of its own staff. The Justice Department, however, had opposed the merger. The commission noted that the routes of the two lines overlap in many areas of the Southwest, including California. Four years ago, Southern Pacific Co., then California’s largest transportation company, merged with Santa Fe Industries in a $4.9-billion deal. Despite the formation of the Santa Fe Southern Pacific Corp. holding company, the two railroads continued to be operated separately. They were required to actively compete for business.

Founded in the 19th Century, both railroads played important roles in California’s history and growth, transporting immigrants to the state and bringing in industry.

The consolidated system would have been the nation’s second-largest railroad in terms of track mileage and gross revenue. Burlington Northern is No. 1 in trackage and CSX--a consolidation of the Chessie System and the Seaboard Coast Line--is first in revenue. But a merged Santa Fe-Southern Pacific line, with its 52,000 employees, would have been the largest U.S. railroad employer.

Speculation on Next Move

Analysts speculated Tuesday on what the company’s next steps would be now that the merger plan appears to be dead and on how much its assets are worth. George O. Zimmerman, an analyst for Gruntal & Co., a New York brokerage company, said Santa Fe Southern Pacific “has a couple of suitors but they will come in with very low bids. They know something must be sold.”

He said Southern Pacific alone is worth between $500 million and $700 million but that the first offer might be as low as $350 million.

E. Magnus Oppenheim, president of the New York investment house that bears his name, said that since it’s been about a year since the original denial, Santa Fe Southern Pacific has had time to formulate a “strategy or game plan.” But the entire company is now up for grabs, “an asset play,” he said, adding that it is the company’s responsibility to “maximize the assets for the shareholders.”

That is the reason, analysts said, that Santa Fe Southern Pacific stock rose so sharply Tuesday. It was the most heavily traded issue on the New York Stock Exchange with a volume of 4,905,800 shares. It closed at $50 a share, up $3.75.

And some suitors openly expressed their intentions Tuesday after the ICC vote. Landon Rowland, president and chief executive of Kansas City Southern Industries, said in an interview that his firm is particularly interested in buying Southern Pacific. He said a formal offer will be made within 60 days.

Burlington Northern Railroad said it was interested in certain portions of Santa Fe Southern Pacific’s railroad units. “We don’t need another railroad,” a spokesman said, “but we would be interested in certain line segments.”

Oppenheim said he believes that an Eastern railroad company might purchase either of the railroads. That would result in a transcontinental carrier that could haul East Asian imports across the country without the need to transfer them from one line to another.

DERAILING THE SANTA FE-SOUTHERN PACIFIC MERGER On Tuesday, the Interstate Commerce Commission refused to reconsider its rejection last year of a merger of Santa Fe Railway and Southern Pacific Transportation Co. The merger would have created the nation’s second-largest railroad with 24,797 miles of track.

Dec. 23, 1983--The parent companies of the two railroads--Santa Fe Industries of Chicago and Southern Pacific Co. of San Francisco--merge, forming Santa Fe Southern Pacific Corp.

March 23, 1984--Santa Fe Southern Pacific formally asks the Interstate Commerce Commission to OK a merger of the two railroads. Meanwhile, they are run separately.

July 24, 1986--The ICC stuns the railroad industry by rejecting the merger because of “anti-competitive” problems.

Dec. 9--The company asks the ICC to reconsider, saying many problems are resolved.

April 20, 1987--Santa Fe Southern Pacific Chairman and Chief Executive John J. Schmidt resigns, reportedly ousted by directors displeased with the way the merger was handled.

June 30--The ICC decides not to reconsider the merger and orders the company to sell one or both of the rail lines. Santa Fe Southern Pacific announces plans for a “significant realignment,” including the sale of several operations to focus on its “core businesses” of real estate, petroleum and minerals holdings, and transportation.