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UP unloading truck unit
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May 21, 1998: 10:40 a.m. ET
But experts call the troubled railroad's $550 million stock offering 'low'
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NEW YORK (CNNfn) - The directors of Union Pacific Corp., North America's largest railroad, have approved the sale of the company's ill-fitting trucking subsidiary, Overnite Transportation Co., in what industry observers say amounts to a fire sale stock offering.
Faced with snarled rail traffic and high debt that it wants to pay down, Union Pacific hopes to raise as much as $550 million from the sale of Overnite, a specialist in consolidated shipments. Union Pacific bought Overnite for $1.2 billion in 1986, but has struggled ever since with integration problems.
UP executives said the divestiture of the secondary trucking business would allow them to concentrate on their core rail operations, spread over 36,000 miles of track in 23 states. But analysts, who had expected a sale price $100 million higher, viewed the offering as a setback.
"That looks relatively low to what I would have thought," said Douglas Rockel, an analyst with Furman Selz, commenting on the $550 million estimate UP gave in a regulatory filing with the Securities and Exchange Commission.
Rockel said he had calculated -- overly hopefully, as it turned out -- a public offering price of anywhere from $645 million to $690 million, based on a rough formula that factored in Overnite's estimated net earnings and cash flow for 1998.
Trucking companies, analysts say, typically trade at multiples of 12 to 18 times earnings. At $550 million, Rockel said, Union Pacific's current stock offering for Overnite is only 12.8 times the subsidiary's estimated profits of $43 million 1998, and only six times its estimated annual cash flow of $115 million.
"More than anything else, it's an admission that, 'Hey, we bought something that maybe we shouldn't have bought 12 years ago,'" Rockel said, explaining the rationale underpinning UP's spin-off of Overnite.
Richard Davidson, Union Pacific's chairman and chief executive, acknowledged this in a statement Wednesday that alluded to the friction.
"Union Pacific's core business is rail freight transportation," he said. "With the Overnite sale, we can devote all of our resources to making the railroad the industry leader in customer satisfaction, cost effectiveness and reliability."
Many of Union Pacific's current travails date back to its acquisition of rival railroad Southern Pacific in 1996. That buyout has proven more troublesome than company officials had anticipated.
System congestion has increased steadily since last Fall, leading to reduced train speeds.
This week, progress in restoring normal service stalled when exhausted crew members rebelled, declining to work weekends after nine months of frequent overtime. More than half of UP's engineers and trainmen on the central corridor between the Midwest and Pacific Coast and in some Houston areas refused weekend work
However, traffic along the Gulf Coast and in the Southeast eased somewhat, the company reported in a weekly filing with the Federal Surface Transportation Board.
Overall traffic, though, is down 9 percent year-to-year, according to Rockel. Union Pacific said the sale of Overnite would result in an unspecified second-quarter loss. UP had estimated debt of more than $9 billion at the end of the first quarter.
Union Pacific's drive to integrate Overnite foundered on tensions between the corporate cultures of the two companies. UP's well-organized Teamster union workers clashed with the large segments of Overnite's operation that were non union-affiliated.
In addition, the long-haul demands of the railroad operations were often at loggerheads with the short-haul trucking business at Overnite.
Shares of Union Pacific (UNP) were down ¼ at 53-9/16 in composite trading Thursday on the New York Stock Exchange.
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Union Pacific
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