Rail Merger Faces Bumpy Track Burlington Northern, Santa Fe Now Face Federal Regulators

The Burlington Northern-Santa Fe rail merger will encounter more difficulty clearing the second hurdle it must vault - government regulatory approval - than it did last week, when shareholders couldn’t wait to approve it.

Inside Washington, the merger partners can anticipate an uncertain review process, with protests from organized labor and bids by competitors and shippers all working to chip away at the merger. Still, analysts believe the merger ultimately will be approved.

“Between now and when the Interstate Commerce Commission gets finished with its review, we will probably see a bumpy road,” said Jeff Medford, an analyst with William Blair and Co. “We still feel very good about the merger and very good about the prospects for the future.”

Merging Burlington Northern Railroad and Atchison, Topeka and Santa Fe Railway would create a carrier, with more than 30,000 route miles in 27 states and two Canadian provinces, that generates $7 billion plus in sales and more than $1 billion in operating income annually.

“The next question is how this is handled in Washington,” said Burton Strauss, an analyst for Lehman Brothers. “The ICC has said it can move faster, but I don’t know that anyone has seen how they would.”

The ICC is considering a change in the merger review process from 535 days to a 180-day schedule for the BN-Santa Fe merger.

The regulatory review, which requires that the ICC approve the merger, presents two key questions: Who will do it and how long will it take?

Because the ICC’s future is in question after Sept. 30 due to budget cutbacks, other Washington interests may get into the act. Congress and the Department of Transportation are wrestling with the question of what ICC functions will be preserved and whether the DOT, the Department of Justice or a combination of the two will administer them.

“I feel comfortable with the 180-day process reaching fruition,” said James Valentine, of Smith Barney, reflecting a view shared by other industry watchers. “The only resistance I see is from either Union Pacific or Southern Pacific. It’s tough to say where they will go because if UP has alternate merger plans they may be less likely to throw a monkey wrench into the works.”