Who Will Rule the Rails? : Promise and Hurdles Await the Winner in Race to Take Over Santa Fe Railway

The Santa Fe railroad helped build California a century ago. Now, as a takeover fight rages for Santa Fe, California stands as both a valuable prize and a big hurdle for the two companies seeking control.

Santa Fe Pacific Corp. agreed this summer to be acquired by Burlington Northern in a stock swap valued at $2.5 billion. But early this month, Union Pacific Corp. weighed in with a surprise $3.3-billion rival offer.

For Burlington, a Ft. Worth-based railroad that stretches from Texas across the Great Plains to the Pacific Northwest, Santa Fe would provide a strategic link to California, including its north-south route that snakes through the state’s farm-rich midsection.

Union Pacific, meanwhile, already has a significant presence in Northern and Southern California. Those routes run very close to tracks operated by Santa Fe in the Los Angeles and San Francisco areas.

And it’s that overlap that prompted Santa Fe to immediately reject Union Pacific’s bid--despite the much higher price--on grounds it would reduce rail competition in California and thus never be approved by the Interstate Commerce Commission.

Some analysts agreed. “There’s no way on God’s green Earth that they (Union Pacific) can expect to get this deal through” the ICC, said Scott Flower of Kidder Peabody & Co.

Union Pacific’s offer, he said, is aimed mostly at derailing Burlington’s effort. “It’s pretty clear this is a defensive maneuver to see if they could cause problems,” he said.

Burlington Northern Chairman Gerald Grinstein has also blasted the Union Pacific bid, saying it is “nothing more than an attempt to stifle healthy competition in the western United States.”

But others, including some shipping and transportation executives in California, said that they’re not concerned about a Union Pacific-Santa Fe marriage. Why? Because they would still have one other big carrier to turn to: Southern Pacific Rail Corp., the dominant railroad in the state.

“As long as you have two, you still have the (competition) in place,” said Al Fierstine, marketing director at the Port of Los Angeles. “I don’t see any impact to the Southern California market other than instead of having three, you have two main carriers.”

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Southern Pacific, based in San Francisco, has more than 50% of the California freight rail market, based on user fees that the railroads pay to the California Public Utilities Commission. The railroad also extends to the Pacific Northwest, Texas, Colorado and east to Chicago.

So far, Southern Pacific has said only that it’s studying the battle for Santa Fe, and Southern Pacific spokesman Mike Furtney declined to elaborate.

It was Southern Pacific, in fact, that tried to merge its rail line with Santa Fe’s in 1986, but the deal was blocked by the ICC for being “anti-competitive.”

Union Pacific has even hinted that its offer for Santa Fe would also give the ICC pause. In announcing its bid, the Bethlehem, Pa.-based concern said it would, in advance, grant unspecified conditions to Southern Pacific, Burlington and other railroads to ensure competition in the West.

But Union Pacific says it’s serious about buying Santa Fe, whose railroad is formally called the Atchison, Topeka and Santa Fe Railway.

“We’re in this thing to win,” said Union Pacific spokesman Gary Schuster. Indeed, Union Pacific stepped up its attack last week by announcing plans for a proxy fight to take control of Santa Fe before Burlington can complete its deal.

The fight for Santa Fe, based in suburban Chicago, is part of a larger wave of big rail mergers that began sweeping the industry this year. The railroads believe mergers can help them cut costs, boost their efficiency and reduce delays for shippers, all so the railroads can grab a bigger share of the $235-billion market for U.S. intercity freight transport.

The railroads currently are enjoying a solid period of growth amid the economy’s expansion, and they still carry nearly 40% of the nation’s intercity freight in terms of tonnage.

But in terms of revenue, the railroads have watched their share of the intercity freight market plunge over the past several decades, to about 13% currently, as the trucking industry became the dominant player. The highways now account for about 40% of market revenue, according to the Eno Transportation Foundation, a think tank in Lansdowne, Va.

In pursuing Santa Fe, Union Pacific and Burlington covet Santa Fe’s Los Angeles-to-Chicago route, considered perhaps the industry’s fastest connection between those cities. Santa Fe’s “Texas to Los Angeles (route) is also attractive, for both chemicals and autos” shipped by rail, said Union Pacific’s Schuster.

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There’s another reason why California is key part of Santa Fe’s attraction. Plans are moving ahead for the “Alameda Corridor,” a proposed construction project that will let railroads travel between Downtown Los Angeles and the ports of Los Angeles and Long Beach at much higher speeds than are currently allowed, thus enabling the trains to handle substantially more shipments arriving at the ports.

In addition, the ports are a major source for “intermodal” cargo, meaning cargo that’s placed in containers that can be shipped by train and truck. And intermodal shipments, particularly for cargo coming from the Pacific Rim, are expected to keep growing sharply in the years ahead and are “the No. 1 target” in California for the railroads vying for Santa Fe, said Robert L. Banks, chief executive of R.L. Banks & Associates, a consultant in Washington.

But it could well be a year or more before the ICC approves either Burlington’s or Union Pacific’s offers. In the meantime, the railroads, the shippers, companies that rely on the rails to move their goods, state regulators and others will all tell the ICC which merger they prefer.

The California Public Utilities Commission, for instance, hasn’t yet taken sides. But PUC lawyer James Quinn said the agency, which regulates much of the railroads’ activities in the state, will want this question answered about either takeover: “What does it do to competition?”

On the Merger Track

The contest between Union Pacific Corp. and Burlington Northern Inc. to buy Santa Fe Pacific Corp. is part of a growing wave of railroad mergers, which the carriers hope will help them gain back some of the intercity freight market they’ve lost to the trucking industry.

THE COMPANIES AT A GLANCE

Santa Fe Pacific * Headquarters: Schaumberg, Ill. * Chief Executive: Robert D. Krebs * Employees: 15,340 * Miles of track: 8,359 * 1993 revenue: $2.7 billion * 1993 profit: $339 million * Earnings per share: $1.81 * Friday stock price: $14.88

Union Pacific * Headquarters: Bethlehem, Penn. * Chief Executive: Drew Lewis * Employees: 49,000 * Miles of track: 17,835 * 1993 revenue: $7.6 billion * 1993 profit: $530 million * Earnings per share: $3.43 * Friday stock price: $51.63

Burlington Northern * Headquarters: Ft. Worth * Chief Executive: Gerald Grinstein * Employees: 30,502 * Miles of track: 24,500 * 1993 revenue: $4.7 billion * 1993 profit: $296 million * Earnings per share: $3.06 * Friday stock price: $51.63

FREIGHT REVENUE

Percentage of U.S. intercity freight revenues for transport groups:

1983 Trucks: 71.4% Railroads: 17.6% Oil pipelines: 5.7% Domestic air: 2.4% Other: 2.9%

1993 Trucks: 75.4% Railroads: 13.0% Oil pipelines: 3.7% Domestic air: 4.7% Other: 3.2%

RAILROAD EMPLOYMENT

Number of employees at major railroads, in thousands: 1993: 193,000

TRACK MILES

Miles of railroad track owned in the U.S., in thousands: 1993: 186,288

Sources: Bloomberg Business News; company reports; Assn. of American Railroads; Eno Transportation Foundation Inc.

Researched by ADAM S. BAUMAN / Los Angeles Times