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Southern Pacific-Santa Fe Merger Prohibited by ICC

July 25, 1986|ROBERT E. DALLOS | Times Staff Writer

NEW YORK — In a surprise move Thursday, the Interstate Commerce Commission turned down the proposed merger of the Southern Pacific and the Atchison, Topeka & Santa Fe railroads.

The commission, in a 4-1 vote, rejected the railroad consolidation because, as one member said, the anti-competitive problems outweighed the benefits to the public. The action apparently will require the holding company that owns both railroads to sell one or both of them.

The only ICC member to vote in favor of the merger Thursday was Chairman Heather Gradison. The members gave no formal reasons for their votes, and the commission has until Oct. 20 to issue its ruling--and the reasons for it--in writing.

The Santa Fe Southern Pacific Corp., which owns both of the railroads but has been required to operate them separately pending action by the commission, may then appeal the decision in the federal courts.

The consolidated railroad system would have ranked as the nation's second largest in terms of track mileage and gross revenue. (Burlington Northern is No. 1 in track mileage and CSX--a combination of the Chessie Systems and Seaboard Coast Line--is first in revenues.) It would have employed more workers (52,802) than any other American railroad.

Both railroads played an important part in California's growth, drawing immigrants and industry to the state for decades after being founded in the 19th Century.

At an impromptu news conference after the 20-minute hearing of the commission in Washington, a stunned and angry John J. Schmidt, chairman of Santa Fe Southern Pacific, called the action "a horrible mistake" that would harm shippers in the Western and Southwestern United States. He conceded that "we are going to have to sell something," adding that the railroads are "good properties" that would be attractive to buyers.

In a statement issued several hours later, Schmidt said, "We felt that the proposed merger provided a private enterprise solution to a problem faced by both the Southern Pacific Transportation Co. and the AT & SF."

He added that the parent company will now concentrate on "how to redeploy our rail assets in a way that is in the best interests of our stockholders, our employees and our customers." Because the denial was so "totally unexpected," he said, "we had not developed an approved comprehensive plan for these rail assets."

Some Operations Combined

In September, 1983, the Southern Pacific Co., California's largest transportation company, announced that it planned to merge with Santa Fe Industries Inc. in a $4.9-billion deal. The merger was consummated three months later, although the two railroads continued to be operated separately. However, the new company, with nearly $6 billion in annual revenues and more than $11 billion in assets, combined the operations of its two predecessors in natural resources, forest products, real estate services and construction.

Even without the railroad combination, the combined company is a giant. It has more than 5,000 miles of pipelines, real estate and timberland holdings and mineral rights to more than 6.5 million acres of land. It is California's largest private landowner.

In March, 1984, the new company asked the ICC for approval to merge the two railroads. Several other railroads, although they did not oppose the merger, filed requests with the ICC to obtain track rights and other concessions as conditions of the merger.

Didn't Wait for Staff

The ICC ordered that the operations of the railroads remain separate and competitive while it conducted its review. Al Brown, an ICC spokesman, said the commission banned the merger before receiving any formal recommendation on the issue from its staff.

However, the Associated Press quoted Donald Shaw, acting director of the ICC's rail section, as saying that the commission staff favored the merger, although with some conditions that he said the staff believed would solve the competition problem.

The stock of Santa Fe Southern Pacific Corp. was the most actively traded Thursday on the New York Stock Exchange. A total of 3.8 million shares changed hands and the stock closed at $28, down $2.25.

Analysts generally disagreed with the decision. "I'm aghast," said Joseph B. Muldoon, railroad analyst with the Philadelphia brokerage firm of Janney Montgomery Scott. "Here we have one railroad, Southern Pacific, that is . . . marginal (in terms of profitability), merging with another railroad, Santa Fe, that in recent years has not been all that profitable.

"This was a natural merger (in which) you could have abandoned several thousand miles of track and concentrated on the more direct routes and provided improved service to the shipper. I think it is a negative for the two railroads. I'm not going to predict bankruptcy for either one, but I think that both will be in a continual marginal status."

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