Is Union Pacific Headed for a Breakup?
Investors have shown little enthusiasm for
Union Pacific
(UNP) - Get Report
since its troubled merger with
Southern Pacific
, but that apparently doesn't mean they want it tampered with.
However, a year and a half after the major rail merger, that might just happen.
UP customers have encountered massive service problems stemming from its 1996 merger with Southern Pacific. Its difficulties have caused service problems on other railroads, too, and the total cost to rail shippers has been estimated at more than $2 billion.
On Friday, the issue is expected to come to a head. Shippers are meeting in Houston to discuss their complaints and options. And at that meeting,
Burlington Northern Santa Fe
(BNI)
, UP's main competitor in the West, may call for the divestiture of the most snarled part of UP. The
Surface Transportation Board
-- the federal government body responsible for approving or revisiting railroad mergers -- is waiting to hear from the shippers after the meeting before it takes further regulatory action on UP's service woes. It is also waiting for an official filing by Burlington before considering any possible divestiture.
Because of its service problems, UP's stock has struggled while other transportation stocks have soared. The Dow Jones Transportation index has climbed 49% in the past year while UP has stagnated, gaining just 2%. And thanks to Burlington's threat of asking the Surface Transportation Board to revisit the merger, the stock closed down 1 11/16 Monday at 61 5/16. Burlington, which has also suffered service problems due to UP's troubles, has seen its stock struggle as well. It is up only 5% in the past year and closed down 9/16 Monday at 92 3/8 on fears of the company's further entanglement in UP's service quagmire.
Since the merger, Burlington has had an agreement with UP that gives it rights to track along the highly congested Houston-to-New Orleans line. But as problems on the line persist, radiating out from gridlocked Houston, the two railroads have discussed more Burlington involvement. Recently, UP offered joint dispatching with Burlington in Houston and joint operation and ownership of the line. But Burlington CEO Robert Krebs, in a letter dated Feb. 6, said he wants
equal
control and ownership of the line. Krebs told UP in the letter that if an agreement isn't reached by Friday, he will ask the Surface Transportation Board to reopen the merger and order the divestiture or spinoff of part of UP, presumably the Houston-New Orleans line. UP said Monday that there are no discussions at the moment with Burlington.
The federal board has up to five years to revisit its approval of a merger and has already taken regulatory action -- including opening some of UP's lines to other railroads -- to help improve service.
Divesting the UP merger would be a dramatic move. Certainly, breaking UP into the two original companies would throw the nation's rail service into turmoil once again and is highly unlikely to occur. But a more limited restructuring -- such as joint ownership or spinning off the line, as Burlington seems to be proposing -- has drawn approval from shippers.
"We'd have to say at this point that breaking up the merger would be a very positive step for shippers," says Don Olsen, spokesman for
Huntsman
, a long-term UP customer and the nation's largest privately held chemical company with $4.3 billion in annual revenue. Huntsman, which has lost customers and had to close plants because of service problems, hasn't seen any improvement in service.
"I'd be in support of anything that would create more competition," adds Wyn Davey, manager of supply and distribution at
Lubrizol Chemical
(LZ)
, a UP customer. Davey thinks that a proposal similar to Burlington would improve service.
Industry analysts agree that given enough time, UP will be able to solve its service problems. But the company has already done serious damage to its customer base, and its continued problems could multiply if big storms keep hitting the West, says analyst Charles Vincent at
PNC Institutional Investment
. So Vincent says some sort of joint venture between UP and Burlington would make sense, at least until the problems are cleared up and maybe on a permanent basis.
At Friday's meeting in Houston, hosted by the
National Industrial Transportation League
, an organization that represents shippers, shippers will discuss the state of rail service and strategies on how to improve service. And that's where Burlington's Krebs is scheduled to speak and possibly propose divestiture of UP. "We're running out of options real fast and we're willing to consider any reasonable option," says the league's policy director, Ed Rastatter.
In the meantime, UP cites continued improvement in service, stating that most of the railroad is operating normally. Some customers, such as
Zeigler Coal Holding
(ZEI)
, a coal producer based in Illinois, say service has improved significantly. While acknowledging that problems persist along the Houston-New Orleans corridor, UP spokesman John Bromley said the company would oppose reopening the merger or divesting the line.