SAN DIEGO — Workers building the Atchison Topeka & Santa Fe railway across Kansas in December, 1873, labored furiously, putting down as much as four miles of track a day in order to reach the Colorado border by the end of the year.
Meeting the deadline was required if the railroad was to receive a federal grant of hundreds of thousands of acres bordering the new line.
That same overarching interest in real estate is now luring Henley Group and Olympia & York in their efforts to take over Santa Fe Southern Pacific. SFSP's best-known businesses--the Atchison, Topeka and Santa Fe and Southern Pacific railroads--apparently are of secondary interest to the suitors.
What Henley and Olympia & York have their eyes on are some 3 million acres owned by SFSP in 14 states. About 1.3 million acres of those holdings are in California, making SFSP the Golden State's largest private landowner.
While more than 95% of the property is low-value grazing land, desert and timberland, the remaining property includes unique gems of underdeveloped and undeveloped property, many of them parcels in prime urban development areas that SFSP is redeveloping for "highest and best use."
Those diamonds in the rough in the state include 208 acres--now used as a rail yard--near San Francisco's financial district, 20 developable acres near San Diego's harbor front, 350 acres along San Francisco Bay's eastern shore, 716 acres in Fremont and 450 acres of waterfront property in Chula Vista.
In addition, SFSP owns more than 8.1 million square feet of completed office, industrial and retail buildings, more than half of which is in California. Those completed buildings include prime properties such as Southern Pacific's 10-floor, 264,000-square-foot headquarters building at One Market Plaza in downtown San Francisco, a 47% interest in the Pacific Design Center in West Hollywood and a 440,000-square-foot office complex in San Jose, among many others. The company also owns its own 17-floor, 371,000-square-foot headquarters building in Chicago.
Exact Worth Unknown
As profits from SFSP's rail operations have been squeezed by deregulation and increased competition from truckers, real estate has become more and more lucrative for the company. In fact, the $321.7 million from the company's real estate business accounted for 62% of SFSP's $516.2 million in 1986 operating income--before $914 million in railroad restructuring costs.
What is SFSP's real estate worth? Neither Henley, a multi-industry conglomerate based in La Jolla, nor Olympia & York, a real estate and energy concern headquartered in Toronto, would comment. Certainly, its value far exceeds the $640.1-million book value it was given as of last Dec. 31, a fraction of SFSP's total assets of $11.6 billion.
Although analysts' estimates go as high as $9 billion, their best guesses as to the real estate's market value cluster in the $5-billion to $6-billion range. "I think it's worth $6 billion, about $3 billion for the developed part and $3 billion for the undeveloped. It's the real core of SFSP's value," Henry Livingston, a railroad analyst for Kidder, Peabody & Co., said.
SFSP was formed in 1983 when Santa Fe Industries merged with Southern Pacific Co., two railroad giants whose histories during the past century are entwined with the settlement of the West. Both railroads were given huge federal land grants in the early days as incentives to build their lines, although both also bought real estate on the open market.
Most of the post-merger attention has focused on SFSP's unsuccessful attempt to combine the two railroads, a request that was denied definitively in June by the Interstate Commerce Commission. SFSP must now sell one of the railroads. But the 1983 merger also created one of nation's largest--if not the largest--commercial real estate companies in terms of acres owned.
The holdings appear to be large enough and valuable enough to represent well over half of the $9.94-billion price that SFSP has set for itself. Early this month, SFSP told Henley and O&Y that it would consider recommending a $63-per-share cash offer to shareholders. At the time, Henley and O&Y owned, respectively, 14.7% and 6.9% of SFSP's outstanding shares, and both had indicated their willingness to take over SFSP.
Prospects are still cloudy for such a takeover, which--at $63 a share--would be the largest non-oil deal in U.S. corporate history. The stock market crash of Oct. 19 and the collapse of the "junk bond" market have made a takeover of this magnitude much more difficult to finance, E. F. Hutton rail analyst Burton Strauss said.
Skepticism that a takeover is feasible at that price is reflected in the level of SFSP's stock, which closed Friday on the New York Stock Exchange at $50.25, up 37.5 cents, despite indications earlier this month that both Henley and O&Y had agreed to the $63 price.