Union Pacific Corp. agreed Thursday to acquire Southern Pacific Rail Corp., a century-old fixture in California transportation circles that has fallen on hard times, in a $4-billion deal that would create the nation's largest railroad.
The marriage would give Union Pacific annual revenues of more than $10 billion and 34,000 miles of track across 25 states and in Mexico and Canada. But it would leave California with just two railroads, raising fears of reduced competition.
Union Pacific's purchase would probably wipe the Southern Pacific name from the California landscape. Once dubbed "the octopus" in recognition of its huge reach in the West, Southern Pacific lately has been known by a new nickname: "the Struggling Pacific."
Its pact with Union Pacific is the latest in a flurry of multibillion-dollar mergers sweeping corporate America, where rising stock prices and low borrowing costs have spawned a rash of deals in railroading, entertainment, banking, health care and computer software.
The major railroads have aggressively sought partners to blanket additional chunks of the country and rapidly expand their shares of the $235-billion U.S. intercity freight transport market.
Indeed, Union Pacific turned its sights toward San Francisco-based Southern Pacific only after losing a seven-month takeover brawl for California's other major railroad, Santa Fe Pacific Corp., in January. Santa Fe is about to merge instead with Burlington Northern Inc. in another $4-billion deal.
The railroads believe that they can use mergers to cut operating costs, boost efficiency and reduce delays and prices for shippers, all to gain a competitive edge over each other and the trucking industry.
In California, Union Pacific would gain Southern Pacific's prized north-south route that hugs Interstate 5 in the farm-rich San Joaquin Valley and up through the Pacific Northwest. Those lines would then connect to two east-west lines now operated by Union Pacific that link Los Angeles and San Francisco to the Midwest.
But the deals also are rapidly shrinking the industry and could lead to layoffs at Southern Pacific. "This would reduce the number of major railroads in this country to a half-dozen," said David Shuman, managing director of the transportation research firm R. L. Banks & Associates in Washington.
That is a cause of concern for some California regulators and shipping customers, who worry that the proposed merger might raise antitrust problems. The deal must be approved by the Interstate Commerce Commission.
California Atty. Gen. Dan Lungren, who vowed to "actively oppose" Union Pacific's plan to buy Santa Fe on antitrust grounds, "will certainly be looking at this transaction as well," said Lungren's press secretary, Dave Puglia.
But Union Pacific officials and some railroad analysts defended the deal.
"When completed, this transaction will deliver major benefits for customers," Union Pacific Chairman Drew Lewis, a former U.S. transportation secretary, said. He estimated that the combination would save the new Union Pacific about $500 million in annual operating expenses.
Steven Lewins, an analyst at the investment firm Gruntal & Co. in New York, noted that Southern Pacific has been a sick railroad for the past several years, despite its valuable I-5 corridor and other assets. The railroad has been hurt by bloated costs, a reputation for poor service and a lack of investment in new equipment.
"In terms of the ultimate service to the public, the ability to move traffic at a lower cost and the opportunity to rehabilitate the Southern Pacific, it's spectacular," Lewins said of the merger.
The pact would provide one other advantage for Union Pacific, a Bethlehem, Pa.-based concern that is a leading shipper of coal, metals and chemicals. Southern Pacific is a leading shipper of "intermodal" containers that can be carried on ships, trains and trucks.
One of Southern Pacific's big facilities in Southern California is its 300-acre International Container Transfer Facility in Long Beach, the nation's largest such site. The carrier also has major yards in Los Angeles, Colton and the City of Industry.
But assuming the merger is approved, it is doubtful that Southern Pacific will remain intact.
Southern Pacific has only recently begun recovering from its abysmal performance during the past decade. As a result, analysts expect portions of it to be sold or shut down by Union Pacific.
The top five executives of Southern Pacific, including its new chief executive, Jerry Davis, have already decided to leave after the merger is completed, a company spokesman said. Ironically, Davis, 56, took the job after being passed over as a candidate for Union Pacific's presidency.
Union Pacific spokesman Gary Schuster said it is too early to speculate about how Union Pacific would absorb Southern Pacific. He said details of Union Pacific's plans would be disclosed in the coming weeks in filings with the ICC.
Under their proposal, Union Pacific would offer to buy up to 25% of Southern Pacific's stock for $25 a share in cash. Each of the remaining shares would be swapped for either $25 or 0.4065 of a share of Union Pacific's stock. Union Pacific also would assume Southern Pacific's $1.4 billion of debt, giving the transaction a total value of $5.4 billion.