Edition: U.S. / Global

Union Pacific's Santa Fe Offer Uses a Trust

Published: November 9, 1994

The Union Pacific Corporation stepped up its battle for the Santa Fe Pacific Corporation last night, proposing a two-step transaction in which shareholders stand to get less money, but more security, from the Union Pacific deal.

Under terms of its tender offer, Union Pacific would buy 57 percent of Santa Fe's shares for $17.50 apiece -- about $10 a share in cash and $7.50 a share in Union Pacific stock. It would also offer shareholders a way to circumvent the uncertainty of waiting for regulatory approvals that could scuttle the deal.

Union Pacific valued its revised offer at $3.3 billion, down from its $3.8 billion, or $20-per-share, offer rejected by Santa Fe's board last week.

The proposal came only 10 days before scheduled shareholder meetings at both Santa Fe Pacific and at Burlington Northern, which have agreed to a friendly merger valued at $3.2 billion, or about $17.21 a share. Santa Fe, based in Schaumburg, Ill., has said that its proposed merger with Burlington Northern stands a better chance of winning regulatory approval than would a marriage with Union Pacific. Officials at Santa Fe and Burlington could not be reached late last night.

At the heart of the revised offer is a twist that would allow shareholders of Santa Fe to cash in on the offer immediately. Union Pacific said last night that it was proposing to set up a voting trust that would be independent of Union Pacific, to hold any Santa Fe shares that were tendered.

Without such a trust, shareholders of Santa Fe would have to wait well more than a year to cash in on the deal as the companies awaited approval of the merger by the Interstate Commerce Commission, a Union Pacific spokesman said. This way, he explained, shareholders could cash in right away.

Eighteen of the 19 members of the Union Pacific board approved the proposal in a telephone conference call just after 6 p.m. eastern standard time. Missing from the call was Drew Lewis, the Union Pacific chairman who is on a medical leave at an alcohol-treatment facility. Dick Davidson, president of the Union Pacific Corporation, faxed a letter to Robert D. Krebs, chief executive officer of Santa Fe, at 6:30 p.m. eastern time to say, "Our proposed acquisition, unlike the Burlington Northern Inc. transaction, would not be contingent upon receipt of I.C.C. approval for the acquisition." The Burlington Northern offer, by contrast, could entail "a delay of up to several years in payment of any of the purchase price" to Santa Fe shareholders, he added in the letter.

Asked if Burlington might not propose a similar voting trust in reaction to the Union Pacific trust, Gary Schuster, a spokesman for Union Pacific, said "It may. It may."

The voting trust, in effect, shifts the risk of the deal from the shareholders to Union Pacific. It is a risk that may not be pleasing to Union Pacific shareholders, who may vote with their wallets in the market today to show that they fear that the I.C.C. would reject the merger. Mr. Schuster said that it was the company's hope that shareholders would understand the long-term benefits of the proposed deal. "This is not a play for next year. It's a play for the next 50 years," he said. But if the I.C.C. were ultimately to reject the merger of Union Pacific and Santa Fe, Union Pacific could potentially find itself unloading Santa Fe shares at lower prices.

Union Pacific's shareholders also are poised to enter a possible deal in which not all the homework has yet been done. The proposal was "not subject to a due diligence or financing condition" to approval of its shareholders, the company said in a press release. Mr. Schuster said last night, though, that "we think we know enough about it that we don't need to go snoop through their books to make this offer." If Santa Fe were to agree to the offer, though, Union Pacific would at that point gain access to the books, he said.

On Nov. 3, Union Pacific said that it would not use a voting trust to get its deal approved by Santa Fe shareholders. But "the market wasn't taking it seriously," Mr. Schuster said in reference to Union Pacific's earlier offer of $20 a share. "We needed to do something to make everyone know we're deadly serious we want Santa Fe."

The offer last night was a 17.6 percent premium over the closing price of Santa Fe yesterday. On the New York Stock Exchange, Santa Fe shares were unchanged today at $14.875. Union Pacific shares rose 25 cents, $49.50, while Burlington Northern stock rose 87.5 cents, to $49.375.