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[UNION PACIFIC LETTERHEAD]
NEWS RELEASE
UNION PACIFIC REINFORCES ITS ICC CASE FOR A COMBINATION
WITH SANTA FE
Bethlehem, PA, November 1 -- Union Pacific
Corporation (NYSE: UNP) today provided Santa Fe Pacific
Corporation (NYSE: SFX) with additional comments on the
factual case Union Pacific would expect to make to the
Interstate Commerce Commission if a Union Pacific/Santa
Fe combination were agreed to. Union Pacific's comments
are in response to a letter dated October 27, 1994 from
Robert D. Krebs, Chairman, President and Chief Executive
Officer of Santa Fe, to Union Pacific concerning the ICC
issue.
In a letter to Krebs, Dick Davidson, President
of Union Pacific Corporation and CEO of Union Pacific
Railroad Company, said "UP does not believe Santa Fe has
given the Union Pacific case and the opinions of outside
experts fair or open-minded consideration."
Davidson said, "[i]t is plainly mistaken to
dismiss, as you do, the very significant service and
efficiency benefits of a UP/Santa Fe merger." Mr.
Davidson added, "[A]s your lawyers surely know, under the
governing law and precedents, public benefits are one of
the two vital elements, together with any adverse effects
on competition and essential services, that are weighed
in the ICC's overall public interest determination."
Regarding the issue of impact of a UP/Santa Fe
combination on rail competition, Davidson told Krebs that
UP "will accept conditions to preserve and enhance rail
competition" in the two markets where UP believes there
are arguably genuine competitive concerns. Davidson also
advised that "UP would accept conditions granting a
second railroad competitive access to every one of the
points served by only UP and Santa Fe -- an offer that BN
and Santa Fe have not made." Davidson pointed out,
"there are a substantial number of points that would be
reduced from two serving railroads to one in a BN/Santa
Fe merger..."
Union Pacific previously submitted to Santa Fe
the conclusions and individual reports of a panel of five
experts on ICC and transportation matters regarding Union
Pacific's proposed combination with Santa Fe. The three
ICC experts on the panel concluded, among other things,
that a UP/Santa Fe merger should have good prospects of
obtaining ICC approval.
In his letter to Krebs, Davidson observed, "The
five members of the panel have never represented UP in
any matter (save for some minor consulting on shipper
attitudes by Dr. Langley). Moreover, they are anything
but single-minded proponents of rail mergers: former ICC
Commissioner Sterrett voted against the SFSP merger
proposal, and Mr. Kharasch led the successful effort of
the railroad opponents to defeat that proposal...
Without exception, the panelists reached distinctly
favorable conclusions as to the case that UP intends to
present to the ICC."
The full text of the letter from Davidson to
Krebs follows.
# # #
November 1, 1994
Mr. Robert D. Krebs
Chairman, President and CEO
Santa Fe Pacific Corporation
1700 East Golf Road
Schaumburg, IL 60173
Dear Rob:
On October 17, we sent to you and the Santa Fe
Board a memorandum describing the case that UP would
expect to present to the ICC in support of a UP/Santa Fe
merger, and on October 24, we forwarded a set of reports
from the five-member panel of experts that UP had asked
to review the October 17 memorandum and express their
views on the prospects for success of UP's ICC case.
Your October 27 letter to Drew Lewis offers various
comments on the October 17 memorandum and the experts'
reports. Your letter reasserts your contention, first
made promptly upon the submission of our original offer
on October 5, that a UP/Santa Fe merger "is not likely to
be approved by the ICC."
UP does not believe that your October 27
letter, any more than your hasty statement in early
October, reflects a fair or open-minded consideration of
the issues. UP's acquisition proposal, as revised on
October 30, offers significantly greater value to Santa
Fe shareholders, based on current market prices, than a
BN transaction. We believe that UP and Santa Fe, working
together, can present a compelling case to the ICC for
approval of a merger of their railroads. If Santa Fe
were genuinely interested in evaluating the case that UP
and Santa Fe can jointly make to the ICC in support of a
merger of their two railroads, it would, as we have
repeatedly requested, meet with UP, in accordance with
the terms of its merger agreement with BN, to analyze and
discuss the issues in depth.
Rather than addressing each and every
inaccuracy in your October 27 letter, we shall confine
ourselves to some key points. We repeat our request that
Santa Fe's Board and management meet with UP and its
advisors to explore the many opportunities inherent in a
meeting of our railroads and to negotiate an acquisition
agreement that is in the best interest of Santa Fe's
shareholders and the shipping public.
1. The detailed reports of UP's panel of experts
support the conclusion that a UP/Santa Fe merger can be
approved by the ICC -- and the strained efforts in your
October 27 letter to find some different message in those
reports, or to dismiss them as "not good enough for our
shareholders" or of "little if any probative weight," are
not credible. The five members of the panel have never
represented UP in any matter (save for some minor
consulting on shipper attitudes by Dr. Langley).
Moreover, they are anything but single-minded proponents
of rail mergers: former ICC Commissioner Sterrett voted
against the SFSP merger proposal, and Mr. Kharasch led
the successful effort of the railroad opponents to defeat
that proposal. These five noted authorities -- and only
these five individuals -- were asked by UP to review the
October 17 memorandum outlining the ICC case UP intends
to make, and to state their conclusions as to the
strength of that case, whatever those conclusions might
be. Without exception, the panelists reached distinctly
favorable conclusions as to the case that UP intends to
present to the ICC."
2. While not "denying that there would be benefits"
from a UP/Santa Fe merger, you dismiss those public
benefits as "unlikely to be persuasive to the ICC" and
unimportant to the ICC's determination of whether to
approve the transaction. But, as your lawyers surely
know, under the governing law and precedents, public
benefits are one of the two vital elements, together with
any adverse effects on competition and essential
services, that are weighed in the ICC's overall public
interest determination. The ICC's rail merger policy
statement and a long line of ICC rail merger decisions
make clear that significant public benefits, such as the
dramatically improved transportation quality at lower
cost that would result from a UP/Santa Fe merger, can
outweigh even significant anticompetitive effects of a
railroad merger and mandate approval of the merger under
the public interest standard. Significant public
benefits are all the more decisive when, as UP is
proposing, any genuine competitive concerns are
alleviated through conditions. Thus, it is plainly
mistaken to dismiss, as you do, the very significant
service and efficiency benefits of a UP/Santa Fe merger.
3. The few specific criticisms you offer of the
benefits we outlined are wide of the mark. Your
discussion of the extensive new single-line service that
would be offered by a UP/Santa Fe merger, for example,
states that "most" of that new single-line service would
be on "north-south routes" in the "central United States"
and suggests that only a BN/Santa Fe merger would produce
"new transcontinental single-line service." This ignores
the number one item on the list in UP's October 17
memorandum of the competitive single-line service
benefits of a UP/Santa Fe merger -- service across the
Southern Corridor between California, Arizona and New
Mexico, on the one hand, and major markets such as New
Orleans and the Gulf Coast chemical producers, on the
other hand. Your statement that Santa Fe intermodal
service already is equal to the service that would be
provided by a UP/Santa Fe combination is contradicted by
the information submitted to the ICC last month in the
BN/Santa Fe merger application. The application shows
about three intermodal trains per day from Chicago to the
San Francisco Bay Area and about four from Chicago to Los
Angeles. There is no doubt that combining UP and Santa
Fe services would permit more frequent schedules in both
corridors. There would also be significant improvements
in automobile handling through instituting new through
unit auto trains.
4. You criticize the treatment of the competition issue
in UP's October 17 memorandum as inadequate, but it is
your letter, not our memorandum, that fails to address
the issue. UP has identified the two markets where we
believe that there are arguably genuine competitive
concerns -- the market for originations of grain in
Kansas and Oklahoma, and the market for the
transportation of service-sensitive freight between
California and the Midwest. UP also stated that it will
accept conditions to preserve and enhance rail
competition in these markets, and gave specific examples
of such conditions. Our memorandum also stated that UP
would accept conditions granting a second railroad
competitive access to every one of the points served by
only UP and Santa Fe -- an offer that BN and Santa Fe
have not made. (Instead, BN and Santa Fe have agreed to
terminate their merger agreement if ICC conditions
significantly affect the economic benefits of the
transaction. As you are no doubt aware, there are a
substantial number of points that would be reduced from
two serving railroads to one in a BN/Santa Fe merger,
including Amarillo, TX; Lubbock, TX; Superior, NE; Fort
Madison, IA; Galesburg, IL; and Trinidad, CO.) Your only
response is to cite as a potential problem the
transportation of service-sensitive intermodal and
automotive traffic in the California-Midwest corridor --
precisely one of the two markets that we identified --
and then to refer to "many other competitive problems."
We wonder what "other competitive problems" you see.
Surely they do not arise from the fact that UP and Santa
Fe are parallel between Denver, Chicago, Kansas City,
Dallas/Fort Worth, Houston and Galveston, since BN and
Santa Fe are parallel between all of the same cities --
as well as in other corridors, such as Denver-West Texas,
where UP is not a competitor.
5. You also dismiss the fact that the ICC has approved
many rail mergers that involved significant parallelism,
arguing that this precedent is too small, that one too
old, the other not sufficiently parallel, and so on. But
this will not wash. In an interview in Sunday's Chicago
Tribune, you say that Santa Fe recently had extensive
merger talks with Southern Pacific. That merger is not
only parallel; unlike UP/Santa Fe, it reduces major
corridors from two railroads to one, and was rejected by
the ICC in 1986. But you can only have had these talks
with the belief that such a parallel merger could secure
ICC approval. Also, only last June, your company bid on
the Kansas City Southern Railway - a proposed merger
between strong carriers that both have routes between
Kansas City and points in Texas and Louisiana. Notably,
so did BN -- and a BN/KCS merger would have been a merger
between strong carriers with significant parallel
aspects. Evidently Santa Fe and BN have only very
recently adopted the view that parallel mergers cannot be
approved by the ICC, and that the express contrary
provision in the ICC's formal rail merger policy
statement has somehow become inoperative.
6. Contrary to your suggestion, a UP/Santa Fe
transaction with conditions that would significantly
strengthen SP's California-Midwest routes would not be at
all analogous to a Great Northern/Northern Pacific
transaction with conditions in favor of the Milwaukee
Road. SP is a clearly viable carrier in the midst of a
major financial turnaround, as you yourself recognized in
an October 28 interview on the Dow Jones Investor
Network; Milwaukee was in financial distress at the time
of the Northern Lines merger. Moreover, at a time when
carload business was the mainstay of the railroads, the
Milwaukee had limited industry access on its Pacific
Extension, whereas SP has the most extensive industry
access in California and is Santa Fe's strongest
competitor in that state.
7. You give no weight to UP's proposal to agree up
front to the conditions necessary to address any
legitimate competitive concerns -- a proposal that the
experts we consulted considered critical in
distinguishing our approach from that of Santa Fe and SP
in the failed SFSP application. Apparently you disregard
this critical factor because of your belief that the "ICC
as a policy matter has declined to use its authority to
create ameliorating conditions to cure anticompetitive
aspects of mergers." But the Commission's policy
statement is directly to the contrary, and one need only
cite the examples of UP/MP/WP, in which some 1,400 miles
of trackage rights were granted to DRGW, SP and MKT to
ameliorate competitive problems, and UP/MKT, in which
extensive conditions in favor of SP and KCS were approved
to ameliorate competitive problems, to demonstrate that
the Commission takes its policy seriously.
8. Finally, you label UP's acquisition proposal "non-
binding," as if this rules it out. Our proposal can
become binding very quickly, once Santa Fe stops seeking
to justify its disregard of its stockholders' best
interests by hiding behind untenable arguments about the
ICC prospects of a UP/Santa Fe merger and sits down with
us to talk seriously.
Both the service and competition issues relating to
a UP/Santa Fe merger are best addressed by detailed,
cooperative discussions between our companies, rather
than by public exchanges of letters. We continue to hope
that Santa Fe will reconsider its refusal to discuss
these matters.
Sincerely,
Dick Davidson
President,
Union Pacific Corporation
Chairman and CEO,
Union Pacific Railroad Company
cc: Board of Directors
Santa Fe Pacific Corporation
