CHICAGO — IN the first hint of a breakthrough in one of the most bitterly contested hostile takeover bids this decade, Santa Fe Pacific Corp. is considering a buyout offer by Union Pacific Corp.
Santa Fe, the nation's seventh largest railroad, reversed itself on Friday and began assessing the merger proposal because Union Pacific offered to establish a voting trust and assume the risks of a tie-up.
Under the trust, Union Pacific, the nation's No. 1 railroad in terms of revenue, would pay Santa Fe shareholders upfront for the buyout. It would also bear the risk that the Interstate Commerce Commission (ICC) will bar the merger and order Union Pacific to divest itself of Santa Fe, most likely at a loss.
Santa Fe had repeatedly spurned Union Pacific, saying it believed the ICC will reject a tie-up as harmful to competitive pricing. By so doing, it avoided a tangle of conflicting obligations posed by the proposed takeover.
Now, as it considers the Union Pacific bid, the Santa Fe board must juggle shareholder interests, federal mandates against anticompetitive railway mergers, and its prior commitment to merge with another suitor, No. 2 railroad Burlington Northern Inc., based in Fort Worth, Texas.
Deadline pressure also weighs on the board of Santa Fe, based in Schaumburg, Ill. Company shareholders are scheduled on Nov. 18 to vote on whether to approve the $3.2 billion friendly buyout by Burlington Northern. Union Pacific says it will withdraw its offer if Santa Fe shareholders approve the Burlington Northern merger.
The board's deliberations are further complicated by the belief that Union Pacific chiefly aims not to acquire Santa Fe but to derail the merger by Burlington Northern, which would supplant Union Pacific as the nation's largest railroad.
``It seems Union Pacific has ulterior motives,'' says Susan Chapman, a securities analyst at Forbes, Walsh, Kelly & Co. in New York.
In addition to torpedoing the Santa Fe/Burlington Northern merger, Union Pacific might want to compel San Francisco-based Southern Pacific Transportation Co. to soften its terms for a merger, Ms. Chapman says.
Merger discussions between Union Pacific and Southern Pacific broke off before Union Pacific made its bid for Santa Fe. Both Southern Pacific and Santa Fe operate lucrative lines between California and the Midwest.
``It seems to me that if Southern Pacific were to rethink its position and go back to UP [Union Pacific], you might see UP walk away from Santa Fe,'' Chapman contends.
Union Pacific has repeatedly denied any underhanded aims. ``We believe very strongly in the benefits this merger would bring to Union Pacific and to our shareholders,'' says L. White Matthews III, executive vice president for finance at the railway. He notes that Union Pacific has annual revenues of $5 billion and is not trying, through the merger, to protect the $85 million it would lose in annual revenues from a tie-up between Santa Fe and Burlington Northern.
``We are not worried about the competitive nature of a Burlington Northern/Santa Fe merger; offensively,'' Mr. Matthews says, ``we would very much like to own the Santa Fe.''
Still, Union Pacific has linked strict conditions and escape clauses to the merger and voting trust that elicit skepticism among securities analysts about its sincerity.
Most significantly, there is no guarantee that Union Pacific will make good on its tender offer and consummate a merger should Santa Fe shareholders meet its condition on Nov. 18 and reject the merger with Burlington Northern.
Also, should Santa Fe shareholders throw off Burlington Northern, Santa Fe directors will be greatly weakened in subsequent negotiations with Union Pacific, securities analysts say.
Should Union Pacific fulfill its tender offer, Santa Fe shareholders would do well in the short term. Union Pacific has pledged to buy 57 percent of all shares of Santa Fe common stock at $17.50 per share. (On Friday, Santa Fe stock closed at $16.25 per share.)
Union Pacific would acquire each of the remaining shares of Santa Fe in exchange for the equivalent of 0.354 of a share of Union Pacific common stock. The total value of the buy out is estimated at $3.3 billion, $100 million more than Burlington Northern offered.
Although Santa Fe shareholders could gain in a takeover, employees might not. The merger application, often lengthy, would test the morale of Santa Fe staff who would rightfully fear for their jobs in a combined railway, security analysts say.