Union Pacific Ends Hostile Santa Fe Bid : Mergers: The move ends a seven-month bidding war and clears the tracks for Burlington Northern to buy the railroad.
Union Pacific Corp., ending a seven-month railroad bidding war, Tuesday scrapped its hostile $3.8-billion effort to buy Santa Fe Pacific Corp. The move clears the way for Burlington Northern Inc. to buy Santa Fe for $4 billion in cash and stock.
The merger would make Ft. Worth-based Burlington the largest U.S. railroad both in terms of track mileage (33,000) and annual revenue from its rail operations ($7 billion).
Moreover, Santa Fe--the Schaumburg, Ill.-based operator of the Atchison, Topeka & Santa Fe Railway--would provide Burlington with a strategic link to California and the West.
Burlington currently stretches from Texas across the Great Plains to the Pacific Northwest and Canada, and south to the Gulf of Mexico. The merger would give it efficient rail systems through California’s farm-rich midsection and between Los Angeles and Chicago.
Union Pacific, too, is strong in the West. But the prospect of a Burlington-Santa Fe marriage raised speculation that the Bethlehem, Pa., company might turn its sights on the dominant railroad in California--Southern Pacific Rail Corp.--if it failed to wrest away Santa Fe.
Union Pacific spokesman Harvey Turner said that “we’re always studying our options,” but he declined to elaborate on the company’s acquisition plans. Mike Furtney, a spokesman at San Francisco-based Southern Pacific, declined to comment.
Wall Street analysts gave such a prospect little credence, at least for now, and investors seemed to agree. Southern Pacific’s stock edged up 12.5 cents to $18 a share in New York Stock Exchange trading Tuesday.
Under their agreement, Burlington and Santa Fe together would buy 63 million of Santa Fe’s shares--about a third of the total outstanding--for $20 each in cash, or $1.26 billion. Burlington would then swap 0.4 of its shares for each of the remaining shares.
The exchange won’t occur until the deal is approved by the Interstate Commerce Commission. But the agency said last week that it was prepared to complete its review in six months instead of the normal 24 months or more, which helped Burlington and put pressure on Union Pacific to boost its offer.
But Union Pacific, which offered $18.50 a share in cash for Santa Fe, said the fight grew too rich for its taste.
“Although a transaction at our current price would benefit Union Pacific shareholders, for us to overpay to acquire Santa Fe would not,” Union Pacific Chairman Drew Lewis wrote in a concessionary letter to Burlington Northern Chairman Gerald Grinstein.
When Burlington and Santa Fe first proposed their merger last June, the price tag was 33% cheaper--$2.7 billion. After the bidding war, Burlington and Santa Fe together now must borrow more than $1 billion to swing their deal--additional debt that will make it harder for Burlington to grow after the merger.
“It’s a very heavy burden,” said Robert L. Banks, chief executive of R.L. Banks & Associates, a transportation consulting firm in Washington.
But Mark Altherr, an analyst at Salomon Bros., said the deal makes financial sense in the long run because Burlington is acquiring Santa Fe’s “superb management” and “superbly run intermodal railroad,” referring to its fast-growing service of shipping cargo in containers that can be moved by rail and truck.
Still, Banks cautioned that the Burlington-Santa Fe deal is by no means final, because ICC approval is still pending. “The proposal embodies over a fifth of the railroad traffic in the whole country, so there’s going to be a lot of people asking questions whether it’s in the public interest,” he said.
Among the likely critics? Union Pacific, he said. Bowing out of the takeover fight “doesn’t preclude UP from renewing its challenge in the (ICC) hearings,” Banks said.
Santa Fe’s stock closed Tuesday at $17.75 a share, down 62.5 cents. Burlington fell $1.875 to $47.50 a share, and Union Pacific jumped $2.625 to $50.25 a share.
