Henley Proposes $8.4 Billion for SFSP as Merger Talks Continue

Apparently resigned to a takeover, Santa Fe Southern Pacific said Monday that it is negotiating with the Henley Group of La Jolla to be acquired for an all-cash price of $63 per share.

Although Henley has agreed to the $63-a-share price, the La Jolla company said Monday that it wants to pay in part with securities. Negotiations between SFSP and Henley are continuing, but neither firm would say where the talks are being held or how soon a resolution is expected.

Assuming that the two companies come to terms, Henley would pay $8.4 billion for the 85.3% of the shares of SFSP that it does not already own. In a filing Monday with the Securities and Exchange Commission, Henley said it increased its holdings in the Chicago-based transportation, energy and real estate company last week to 23 million shares--14.7% of the 156 million shares outstanding.

However, Henley cautioned that, apart from the terms of the proposed deal, “several material matters” remain to be resolved before it makes a formal tender offer, including how it would finance such a huge deal. “There can be no assurance that a definitive agreement will be reached,” Henley said in a Form 13-D filing.

Still, both companies’ disclosures that a price had been agreed to added fuel to analysts’ speculation that SFSP would soon be taken over in one of the largest non-petroleum mergers in history.

SFSP was formed in 1983 by the merger of Santa Fe Industries and Southern Pacific, two companies best known for their railroads. The new company wanted to merge the two lines to make them economically viable but permission to do so has been refused by the Interstate Commerce Commission and, in fact, the ICC has ordered the firm to dispose of one of the railroads.

Henley Group was formed last year from a collection of 35 companies cast off by Allied-Signal, an aerospace and electronics conglomerate based in Morristown, N.J. Henley’s assets totaled $7 billion as of Sept. 30.

Henley is most interested in SFSP’s real estate holdings, which accounted for $321 million--nearly half--of SFSP’s $649 million operating income last year, SFSP spokesman Robert Gehrt said Monday. Due largely to a $914-million restructuring charge, SFSP reported a net loss of $268.9 million on revenue of $5.6 billion last year.

While valued on SFSP’s books at $640.1 million, or just a fraction of SFSP’s $11.6 billion in assets as of Dec. 31, the real estate’s market value has been estimated to range between $2 billion and $9 billion, “depending on which analyst you talk to,” an SFSP official said Monday.

SFSP’s undervalued real estate also has attracted Olympia & York Developments of Toronto, which announced Sept. 28 that it had acquired 6.18% of SFSP’s shares. A spokesman for Olympia & York in New York said Monday that the company would make no comment on the possible SFSP-Henley deal.

Henley acquired its first stake in SFSP late last year when it bought 5% of the outstanding shares. SFSP’s apparent readiness to be acquired comes despite its recent restructuring efforts, including the apparently imminent sale of the Southern Pacific railroad. SFSP has received seven bids of between $750 million and “well over $1 billion” for the railroad, Gehrt said. A bidder was to have been selected before the end of this year.

In addition to the sale of Southern Pacific, SFSP said Sept. 22 that it planned to repurchase up to 38% of its outstanding shares. The company also announced plans to sell one of its interstate pipelines and to place its developed real estate holdings in a real estate investment trust and distribute shares to shareholders.

The company sold its Dallas-based Robert McKee Inc. construction company in September and signed an agreement in October to sell its Santa Fe Pacific Timber Co., owner of 520,000 acres of Northern California timberlands.

Difficult Restructuring

Still, the restructuring was perhaps too ambitious and too expensive. Analyst Joel Price of Donaldson, Lufkin & Jenrette Securities said SFSP directors probably agreed to consider accepting $63 a share from Henley because it was a better return than they would be able to manage with the restructuring.

The stock market crash Oct. 19 and the attendant drop in value of SFSP assets as resalable items may have made the financing for the restructuring difficult to complete, analysts said. In addition, the stock purchases by Henley and Olympia & York have driven the price of SFSP stock up in recent days, making the cost of a repurchase higher.