Santa Fe Southern Pacific Corp. said yesterday that it has agreed to sell the Southern Pacific Transportation Co. to Rio Grand Industries Inc. for about $1.8 billion in a deal that would give the Denver & Rio Grande Western Railroad access to the West Coast and that would end a troublesome chapter in the history of the Santa Fe Railway.
First, however, the transaction must be approved by the Interstate Commerce Commission, which turned down the merger of the Santa Fe and Southern Pacific systems.
The Santa Fe and the Southern Pacific spent nearly four years in a futile effort to persuade the ICC to approve their merger. Combining the two major western railroads would have created the nation's second-longest rail system, but the ICC rejected the plan, overruling a staff recommendation favoring the merger with qualifications.
In June, the ICC refused to reconsider that decision and ordered the SFSP Corp., a holding company formed pending approval of the merger, to divest itself of one or the other of the railroads.
The decision to sell the ailing Southern Pacific to the DRGW, one of five bidders, immediately touched off criticism by the other bidders that suggested the proposed transaction will run into spirited opposition at the ICC.
It also drew fire from Henley Group Inc., a diversified holding company based in La Jolla, Calif., which owns 14.7 percent of SFSP and has expressed an interest in acquiring the holding company and selling off the Santa Fe railroad.
SFSP Corp. said the $1.8 billion price includes $1.02 billion in cash and a promise to assume Southern Pacific's outstanding debt. Robert D. Krebs, chief executive of SFSP, said the company would file its final divestiture plan with the ICC by the end of the year.
He also said that the DRGW had agreed to comply with existing Southern Pacific labor contracts.
"We will do everything we can to facilitate the ICC review and help them process the case quickly," Krebs said.
Industry sources indicated yesterday that one source of concern the ICC might have with the Southern Pacific and DRGW combination is its potential impact on the Union Pacific, which now competes with the DRGW using a portion of the Southern Pacific's tracks.
When the SFSP Corp. was first ordered to divest itself of one or the other of the railroads, there was speculation that the company would choose a nonrailroad bidder to avoid having to seek ICC approval again.
However, the two bids that the company considered most serious were both from railroads -- the DRGW and Kansas City Southern, according to industry sources.
The other bidders were the Guilford Transportation Industries Inc., a coalition of railway unions and the management of Southern Pacific.
Kansas City Southern said yesterday it will continue to pursue its acquisition of Southern Pacific, perhaps by filing a bid with the ICC.
"Based on what we have learned about this proposed transaction, it is simply not competitive with the offer submitted by KCSI," said the KCSI president and chief executive officer, Landon H. Rowland.
Rowland said he was "mystified" by the announcement and described his company's bid as "substantially higher."
Joele Frank, a spokeswoman for KCSI, said that the company would not divulge its bid because of the confidentiality agreement it had made with SFSP, but she said it was "hundreds of millions of dollars higher" than the DRGW bid.
The Henley Group criticized what it called "the unwise decision to sell the Southern Pacific in what amounts to a bankruptcy auction" and reiterated its position that shareholders would be better served by the sale or spinoff of the Santa Fe Railway.
The Railway Labor Executives' Association said it also plans to pursue its bid for the company but left the door open to reaching an accommodation with the Rio Grande.
Jeffrey B. Stone, a railroad analyst with Wertheim & Co., said that the announced purchase price was not out of line.
"I don't think it can really be called a distress sale price," he said. But he said he was curious to see more information about the other bids, particularly Kansas City Southern's. "Santa Fe has guarded these proposals as if they were national secrets," he said.
Stone said that he thought the announcement of the proposed sale would have little impact on either Henley's interest in SFSP Corp. or in that of Olympia & York Developments Ltd., which has also expressed interest in the holding company.
Neither of the companies appears to be seriously enough interested to make a real bid for the company, he said.