Southern Railway has started negotiations that could lead to acquisition of the Illinois Central Gulf Railroad, a key Midwest line that operates the shortest and most direct freight route between the Great Lakes and the Gulf of Mexico.
Stanley Crane, president of Washington-based Southern, revealed the acquisition talks in a brief announcement yesterday.
He said Southern's board agreed toa begin joint studies with IC Industries Inc., owner of the financially weak Illinois Central Gulf, "to determine the feasibility and advisability of Southern acquiring" the line, which operates over more than 9,000 route miles in 13 states.
A combination with the 10,000-mile Southern - which also serves 13 states - would create a giant Southern-Midwest line second among U.S. railroads in length of routes only to the Burlington Northern.
Acquisition of the ICG also would give Southern long-sought access to the Chicago rail hub and extend its lines to Omaha for connection with rail service to the Pacific Coast.
IC Industries, a holding company, has been de-emphasizing its original railroad base. The Chicago company now owns Dad's Root Beer, Midas Corp., and other consumer product and insurance operations. Last Friday, IC won the blessing of Pet Inc. management for a takeover of the diversified St. Louis food firm.
The Illinois Central Railroad was founded in 1851.Over the years, it acquired the Gulf Mobile & Ohio and several other lines. A holding company was established in 1962 to permit diversification, and rail revenues in revent years have declined to 37 percent of overrall IC volume.
A combination of Southern and ICG would be an unusual matchup because the Washington firm is one of the stongest and most profitable in the industry while the Chicago-based railroad has been basically unprofitable in recent years.
ICG lost $9 million on freight revenues to $159 in the first quarter this year. Liabilities topped current assests by some $60.5 million on March 31 compred with a deficit of $29 million the year before.
To help finance needed rehabilitation of some routes, the federal rehabilitation of some routes, the federal government last year agreed to buy $24 million of ICG special stocks to be redeemed over 30 years at an interest rate of 2.6 percent. About 250 miles of track in Illinois and Mississippi are being upgraded with the government investment.
Some Interstate Commerce Commission officials have complained that rail-based conglomerates neglect rail properties and concentrate on other businesses. Indeed, attention to non-rail operations was a factor in the collapse of the merged Pennsylvania-New York Central lines in 1970.
ICG plans to spend $135 million to upgrade its facilities this year. Outlays for maintaining track and equipment have been increasing, and some 60 new locomotives are being built for ICG this year.
Coal is the major commodity carried by ICG trains, accounting for 25 percent of total tons and 10 percent of freight revenues. Other major commodities hauled include chemicals, food products, lumber and wood products; total freight revenues last year were $623 million. ICG also operates commuter trains in the Chicago area, carrying about 40,000 riders a day in a service subsidized by the Regional Transportation Authority.
The possible acquisition of ICG represents Southern's second attempt to expand toward the west. Following enactment of legislation in 1976 designed to encourage and speed certain rail mergers, Southern and the Missouri Pacific talked merger for five months before dropping the proposal.
Another proposed major rail combination - a transcontinental merger of Seaboard Coast Line Industries and the Southern Pacific - was scuttled by SCL on May 18, also after five months of talking. In contrast, Burlington Northern and the Frisco line have agreed to combine, and the government is considering the proposal, which would bring BN into parts of the Southeastern states.
Cities already served by both Southern and ICG include New Orleans, Louisville, St. Louis, Memphis and Birmingham. Southern was organized in 1894 through the combination of various regional lines. Annual revenues exceed $1 billion and, during the first quarter this year, Southern earned record profits of $29 million of revenues of $288 million.
Southern also announced yesterday that its board voted to increase and modify capital stock in the firm subject to government and stockholder approval. The proposal would reduce the number of preferred shares by providing that each five such shares become one share of a new stock, with one vote each, and that the dividend rate be increased from $2.50 to $2.60 a share on an equivalent basis.
In addition, Southern would eliminate the pre-emptive rights of commonstockholders to buy any new offerings of common stock in proportion to their current holdings. The new authorized capital base of the firm would be 10 million serial preferred shares, 10 million serial preference shares and 50 million common. Currently, there are authorized 6 million preferred, 5 million serial preference and 30 million common shares.
Crane said the new capital structure would provide greater corporate and financing flexibility.