Union Pacific Strikes Deal To Buy Southern Pacific Merger Would Create The Nation’s Largest Railroad System
Union Pacific Corp. said Thursday it will buy Southern Pacific Rail Corp. for $5.4 billion, or $25 a share, creating the largest railroad in North America.
If approved, the merger would create a 34,000-mile railroad serving 25 states, Mexico and Canada. The companies had combined 1994 revenue of $9.54 billion.
The combination is the third megamerger announced in the past four days following Walt Disney Co.’s acquisition of Capital Cities/ABC Inc. and Westinghouse Electric Corp.’s purchase of CBS Inc. Altogether, more than $30 billion worth of mergers were announced this week.
The Union Pacific and Southern Pacific merger could result in higher prices for shippers but would make it easier to move goods among the Midwest, California, the Gulf Coast and Mexico, analysts said.
“What I see going on in the Western railroad industry is tremendously beneficial to the companies and to the shippers,” said James Higgins, an analyst at Donaldson Lufkin & Jenrette. “You’re going to see larger, more extensive systems with better quality.”
Under the terms of the transaction, Bethlehem, Pa.-based Union Pacific next week will begin a cash tender offer for as much as 25 percent of Southern Pacific’s stock.
The shares purchased in that tender offer will be placed in a voting trust, a mechanism to protect shareholders if the Interstate Commerce Commission rejects the merger.
If the transaction goes through, each remaining share of San Francisco-based Southern Pacific stock then will be converted into the right to receive $25 in cash or 0.4065 share of Union Pacific stock.
Union Pacific will pay about $4 billion for the existing shares of Southern Pacific stock and also will assume about $1.4 billion of Southern Pacific debt.
The companies said the boards of both companies approved the transaction Thursday, and they expect to reach a final agreement soon. The railroads expect to apply for Interstate Commerce Commission approval by Dec. 1.
Southern Pacific’s stock rose $2.62-1/2 to $22.25 Thursday in trading almost eight times its daily average after reports that a takeover was imminent. Union Pacific’s shares rose 62-1/2 cents to $65.
Union Pacific Chairman Drew Lewis said the combination would result in efficiencies and increased traffic worth about $500 million a year.
“The combined system will be able to offer new services that neither Union Pacific nor Southern Pacific can offer on its own,” he said.
The merger would link Union Pacific’s strong presence in the Midwest to Southern Pacific’s California routes, which run north and south. It is sure to face antitrust scrutiny.
The ICC will likely force Union Pacific to sell some tracks or arrange sharing agreements with other rails.
Both railroads have routes that ring the Gulf Coast, and both run nearparallel tracks between the San Francisco Bay area and Salt Lake City.
Union Pacific employs nearly 400 people in Washington and Idaho, and operates a main line from Eastport, Idaho, through Spokane to the Tri-Cities. It also maintains a terminal facility in Spokane for Amtrak passenger service.