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UP will wait on own deal
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January 20, 2000: 3:08 p.m. ET
CEO says he'll wait for CN-BNSF deal to clear before weighing own merger
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - Union Pacific Corp., the nation's largest railroad, isn't looking at an immediate deal to insure it keeps that distinction, said Dick Davidson, its chairman and chief executive.
The company would fall into second place if regulators approve a proposed $19 billion merger between Burlington Northern Santa Fe Corp. (BNI) and Canadian National Railway (CNI).
But Davidson said in an interview Thursday that UP will not try to do its own deal during the anticipated 18-month review of the CN-BNSF deal by regulators.
"We're not going to do a thing until we see what happens in the review process and then we might not do anything," he said.
Union Pacific (UNP) had serious service problems from its combination with Southern Pacific Rail Co. in 1997, a deal that caused two years of headaches for shippers and losses for UP.
The company released better than expected results Thursday. Davidson says the profits are proof that it has put its problems in the past.
Competitors united against deal
Davidson and executives from three of those other railroads, CSX Corp. (CSX), Norfolk Southern Corp. (NSC) and Canadian Pacific Railway (CP), signed a full-page advertisement in the Wall Street Journal last week saying it is too soon for the BN-CN deal and that the industry needs to digest the round of mergers that started in 1995.
Union Pacific Chairman and CEO Dick Davidson
It also predicted that if the BN-CN combination were approved, it would spur consolidation of the industry down to two railroads, each serving much of the continent.
But Davidson said Thursday he has not had discussions with executives of those other railroads over a possible future merger in response to the CN-BN deal.
"Obviously, just in the normal course of business, you're looking at how to strengthen the company," he said. "But it would way premature to think how we're going to pare up with one another."
UP might not be able to wait
Despite Davidson's statement some rail analysts believe UP may not be able wait for a year and a half before exploring its own deal.
"They'll have to do something," said Doug Rockel, analyst with ING Barings. "If he senses in six to nine months that the deal is going forward, he can't sit there for years and watch them cherry-pick their best freight."
But Rockel says UP and the other railroads have a lot of clout with regulators, and he estimates that their decision to unite against the proposed deal lowers its chance of approval from about 50-50 to about 60-40 against.
Officials with CN and BNSF said the opposition from the other railroads to their proposed deal is self-serving and they are confident it will not stop the combination.
"We look forward to presenting our case to the Surface Transportation Board," said Mark Hallman, spokesman for CN, referring to the U.S. regulators.
"The board's mandate is to protect the interests of shippers, not of competitors. We urge everyone to wait to see the facts before pouncing in absence of information."
Predictions of service problems
Davidson also said Thursday if regulators do approve the BN-CN deal, it would constitute "pre-approval" of proposed deals to follow.
And he challenged the BN-CN contention that the merger can be accomplished without service disruptions that have plagued other recent mergers, such as UP's purchase of Southern Pacific Rail Co. in 1997 that cause two years of problems and losses for that railroad.
"If they're going to get the benefits out of it, just holding hands in an end-to-end holding company can't do it," he said. "If you try to join up railroad executives from Montreal and Texas, you'll have a cultural change that is unprecedented in the industry. Who knows what will happen."
Officials from CN and BNSF repeated assurances from their officials that they can combine without problems.
"If you look at our record and their record, they are the ones that have damaged the confidence of shippers in railroads, not us," said Hallman.
Better than expected 4Q
In the fourth quarter, Union Pacific had net income of $242 million, or 95 cents a diluted share, compared with $96 million, or 39 cents a share a year ago, not including charges related to its since-delayed plans to spin off its trucking company.
Analysts surveyed by First Call had been looking for only 88 cents a share in the quarter. With the various charges a year ago the company had a $189 million loss, or 77 cents a share in the quarter. Revenue for the quarter was up 7 percent to $2.9 billion.
For the year the company had net income from continuing operations of $783 million, or $3.12 a diluted share, compare with a loss of $86 million, or 35 cents a share, in 1998, not including the special charges. With those charges 1998 losses reached $633 million, or $2.57 a share. Annual revenue increased 7 percent to $11.3 billion.
Union Pacific Railroad's ratio of operating expenses to revenue, a key measure of a carrier's financial performance, improved to 80.8 percent in the quarter, from 89.4 percent a year earlier.
"It looked pretty good," said ING's Rockel. "The top line (revenue) wasn't better than expected, but on the cost side, they showed some real gains."
Losses at struck trucking company
The one problem was at Overnite Transportation Co., its trucking subsidiary, which posted a $13 million operating loss after a $16 million operating profit a year ago.
The International Brotherhood of Teamsters has been striking the company since October 24 as it tries to organize employees there and win the carrier's first union contract.
But UP officials said Overnite's loss was do to higher costs for dealing with the union's actions, rather than loss of business. Revenue at the carrier rose $1 million to $259 million, and the company said its on-time delivery performance was 97 percent, the best performance of the year.
Officials with the Teamsters' challenged the company's contention that business is not severely impacted by the strike.
"It has to be a wake-up call for Overnite and Overnite's parent UP that breaking the law doesn't pay," said union spokesman David Cameron.
UP's stock was down 1-1/8 to 42-1/2 in late afternoon trading Thursday. 
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Union Pacific Corp.
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