SFSP Agrees to Sell Its Railroad to Rio Grande : $1.8-Billion Deal Must Be Approved by ICC; Other Bidders Protest the Plan

Santa Fe Southern Pacific said Monday that it has agreed to sell its Southern Pacific railroad to Rio Grande Industries, parent of the much smaller Denver & Rio Grande Western Railroad, in a deal valued at $1.8 billion.

The transaction--for a total of $1.02 billion in cash and the assumption of $780 million in Southern Pacific debt--brought immediate protests from several parties that had expressed interest in buying San Francisco-based Southern Pacific Transportation or its Chicago-based parent company. The merger of the two historic railroads also is subject to approval by the Interstate Commerce Commission, which has proven to be an unpredictable body as far as Santa Fe Southern Pacific is concerned.

The ICC stunned the railroad industry last year when it refused to allow the merger of the Southern Pacific and the Santa Fe railroads and ordered the parent firm to sell one of them. The parent companies of the two railroads merged in 1983 but the railroads have been operated as separate and competing lines while awaiting the hoped for approval to merge them.

“After looking at all the alternatives, we believe this proposed sale is consistent with the public interest and is in the best interest of our shareholders,” Robert D. Krebs, chief executive of Santa Fe Southern Pacific, said Monday.

“Our petition would preserve competition,” said Samuel R. Freeman, vice president of Rio Grande Industries. “We want to underscore that this is a merger. There are no hidden agendas.”

Tough Job Ahead

SP has 25,390 employees and Denver & Rio Grande has about 2,200.

The merger would create the nation’s fifth-largest railroad by combining the 13,000-mile Southern Pacific, currently ranked sixth, with the regional Denver & Rio Grande, which has 2,500 miles of track in Colorado and Utah but also has trackage rights on Union Pacific lines into Kansas City.

It would vault the Denver & Rio Grande--generally considered to be a well-run railroad that remains profitable but has suffered hard times recently along with Colorado’s coal industry--into the ranks of the majors. The Southern Pacific, on the other hand, has deteriorated greatly, and at one point last year former SFSP Chairman John Schmidt said the railroad faced bankruptcy if the merger with Santa Fe were not approved.

“Simply getting (Southern Pacific) is not enough,” said analyst Joel Price of Donaldson, Lufkin & Jenrette Securities. “They have to make it fly.”

Santa Fe Southern Pacific received seven bids for the Southern Pacific, ranging from $750 million to more than $1 billion, and narrowed the field to five bids. Two of the other finalists were railroads: Kansas City Southern Industries and Guilford Transportation Industries. The other bids were parallel offers from Southern Pacific’s own management and the Railway Labor Executives Assn., an umbrella group of rail unions. An SFSP spokesman declined to disclose details of the other bids.

Other Bidders Angry

But analyst Price said, “The face amount of the money is not the issue,” especially if securities were involved in some of the other offers. “The reputation of (Rio Grande owner Philip) Anschutz--his wealth, his reliability, his honor--were important considerations in this decision,” Price said. In addition, Rio Grande has agreed to honor all of Southern Pacific’s labor contracts.

Kansas City Southern Chief Executive Landon H. Rowland said he is “disappointed and mystified” by SFSP’s decision, adding that his company will continue to pursue the acquisition of the Southern Pacific before the ICC.

“Based on what we have learned about this proposed transaction, it is simply not competitive with the offer submitted by KCSI,” Rowland said. “Our bid for the Southern Pacific is substantially higher, has fewer regulatory problems, is financed, and best preserves competition among Western railroads. We do not understand how either Santa Fe shareholders or the public interest is served by accepting a lower bid with greater competitive problems.”

A Kansas City Southern spokeswoman declined to give details of her company’s offer except to say that it is “hundreds of millions of dollars” higher than that of Denver & Rio Grande’s. The ICC “already has made negative comments on the combinations of the Denver & Rio Grande and the Southern Pacific,” she said--an assertion that Freeman of Rio Grande Industries called “patently untrue.”

Similarly, the Railway Labor Executives Assn. said it would press its offer. Southern Pacific Transportation’s Chairman Denman K. McNear said he is disappointed that management’s offer was not favorably considered. And Henley Group, which is interested in buying all of Santa Fe Southern Pacific, said it thinks the company should sell the healthier Santa Fe Railway because it would bring a higher price.

Investment adviser E. Magnus Oppenheim said: “Management knows what it’s doing and if they feel that this is the deal they want, then they’re going after this deal.” The proceeds to SFSP from the railroad sale and the divestiture of other properties--so far totaling $1.7 billion--”certainly continues the process of realizing intrinsic value of the Santa Fe that many of us have looked forward to,” he said.

No Decision On Name

SFSP has said it plans to distribute at least $4 billion in cash and/or company stock to shareholders. And it said Monday that it is close to selling three pipelines it has put on the block.

Denver & Rio Grande said it intends to file its petition with the ICC within 60 days. But SFSP spokesman Richard Hall said he could not predict how long the approval process would take.

“We thought our case would take 15 months and was certain of approval--and it took 30 and was turned down,” he said.

There was also some confusion over the future name of the merged railroad. Freeman said Rio Grande has not had time to think about a name, although its September announcement of its offer suggested that the Southern Pacific name would survive. Hall, however, said he knows of no plans to drop Southern Pacific from the Chicago-based holding company’s stationery.