MOODY'S MONITORS DEVELOPMENTS IN PROPOSED MERGER OF UNION PACIFIC CORPORATION AND SOUTHERN PACIFIC RAIL CORPORATION
New York, August 3, 1995 -- Moody's Investors Service is monitoring developments in the proposed merger of Union Pacific Corporation (UP) and Southern Pacific Rail Corporation (SP). In a press release earlier today, it was announced that the boards of the two companies have reached agreement providing for a two-step merger plan. According to the plan, which is expected to be signed shortly, UP will begin a cash tender offer next week to acquire approximately 25% of SP's outstanding common shares at $25 per share. The merger is subject to approval from both companies shareholders, as well as from the Interstate Commerce Commission (ICC). The remaining SP shares would subsequently be acquired for
cash and UP stock at a ratio of 0.4065 shares of UP in exchange for each SP share. The total transaction value is estimated at $3.9 billion.
According to the rating agency, the proposed transaction is consistent with UP's growth strategy and efforts to refocus on core transportation activities. Moody's believes that meaningful cost savings and operating efficiencies could be derived from the combination of the two systems, which would form the nation's largest railroad in terms of revenue. The combined entity would be able to provide extended single-line service throughout the western United States, and would be strategically positioned to serve the Mexican market.
Moody's noted that the proposed transaction would increase UP's financial leverage and further weaken its debt-protection measurements, indicating potential for downward pressure on the ratings if the transaction is consummated. Nevertheless, Moody's noted that the operating strength of the combined systems, along with UP's plan to fund a portion of the acquisition with equity, indicate that UP's long-term debt ratings should remain well within the investment grade category. At the same time, SP would likely benefit from UP's superior service quality and asset management, which could have positive implications for its ratings. Moody's anticipates that UP would negotiate potential trackage and other rights with rail competitors prior to ICC filing, and also indicated that uncertainties remain regarding the ultimate structure of the transaction and the ICC approval process and time frame. Consequently, Moody's will monitor developments in the proposed merger and will make any necessary rating adjustments as details become more certain.
The current ratings are:
Union Pacific Corporation -- A3 rated senior unsecured debt, pollution control bonds, and industrial revenue bonds-- A3 counterparty rating-- (P)A3 rated shelf registration for senior unsecured debt-- (P)"a3" rated shelf registration for preferred
stock-- (P)Baa1 rated shelf registration for subordinated debt-- and Prime-2 commercial paper rating.
Union Pacific Railroad Company -- Aa2 rated equipment trust certificates and pass through certificates.
Missouri Pacific Railroad Company -- Aa2 rated equipment trust certificates-- A2 rated first mortgage bonds-- Baa1 rated
general income mortgage bonds-- and Baa2 rated income debentures.
Chicago & Eastern Illinois Railroad Company -- Baa2 rated income debentures.
Chicago and North Western Railway Company -- A2 rated pass through certificates.
Texas & Pacific Railway Company -- A2 rated first mortgage bonds.
Southern Pacific Rail Corporation -- Ba3 rated senior unsecured notes.
Southern Pacific Transportation Company -- Ba1 rated first and refunding mortgage bonds-- Baa1 rated pass through
Union Pacific Corporation is a holding company headquartered in Bethlehem, Pennsylvania. Through its wholly-owned subsidiaries, UP is engaged in railroad and trucking transportation, as well as oil, gas and mining. Southern Pacific Rail Corporation, headquartered in San Francisco, California, is the holding company for both Southern Pacific Transportation Company and The Denver and Rio Grande Western Railroad Company.
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