Union Pacific Corp. said it will let Burlington Northern Santa Fe Corp. share 3,800 miles of railroad track--including segments in California--in exchange for support for its proposed $4-billion acquisition of Southern Pacific Rail Corp.
In addition to sharing the tracks, which run across the Gulf Coast and a portion of the western United States, Union Pacific will sell Burlington Northern more than 335 miles of track in California for $150 million.
Union Pacific said it hopes the accord will help it gain government approval to buy Southern Pacific and become North America's largest railroad, as well as ease concerns over competition.
"This should certainly strengthen our case," said Richard Davidson, chairman of Union Pacific. "We did talk to hundreds of customers, state government officials and all the people who are stakeholders in this."
Most important is that under the agreement, Ft. Worth-based Burlington Northern said it will not oppose a Union Pacific-Southern Pacific combination.
Some hurdles remain before Union Pacific and Southern Pacific create a 34,000-mile railroad serving 25 states, Mexico and Canada. They include possible objections from labor unions or complaints from shippers in portions of Louisiana and Texas, analysts said. "You have a lot of railroads crisscrossing and we don't know from this agreement whether all shippers are protected," said Steve Lewins, an analyst with Gruntal & Co.
Union Pacific plans to file for regulatory approval with the Interstate Commerce Commission in December, hoping for the go-ahead about six months later.
Davidson said Burlington Northern provided the best "competitive alternative," compared to other railroads. Rail companies including Kansas City Southern Industries Inc., Illinois Central Railroad Co., Wisconsin Central Transportation Corp. and Conrail Inc. expressed interest, Davidson said.
Shares of Union Pacific rose $1 to finish at $66.875. Southern Pacific's stock rose 50 cents to $24.125; Burlington Northern's rose 87.5 cents to $73. All are traded on the New York Stock Exchange.
The agreement was reached over the weekend at Union Pacific's Rail Corp. headquarters in Omaha, just after Burlington Northern's merger with Santa Fe was completed last Friday.
Under the track-sharing agreement, Burlington Northern will pay an undisclosed fee to use Union Pacific and Southern Pacific routes.
Burlington Northern will gain or increase access to several regions: the Texas Gulf Coast, including routes from Houston to New Orleans; the Mexican border through parts of Texas; sections of the western United States; California, and the Pacific Northwest.
As a result, Burlington Northern will be a stronger competitor in the Gulf Coast petrochemical belt and points along the U.S.-Mexico border, said Robert Krebs, the railroad's president and chief executive. Burlington Northern operates on more than 31,000 miles in 27 states and two Canadian provinces.
The agreement will allow Burlington Northern to compete for an estimated $1 billion in annual revenue, analysts said.
"Clearly the deal is favorable for the newly formed Burlington Northern Santa Fe," said Paine-Webber analyst Scott Flower.
Burlington Northern will buy Union Pacific's "Inside Gateway" route in Northern California, linking its Oregon lines to its California network.
The agreement also grants some routes to Union Pacific and Southern Pacific.