U.S. CRITICIZES RAIL MERGER PLAN.

Byline: Greg Groeller Bloomberg Business News

Union Pacific Corp.'s proposed $5.4 billion acquisition of Southern Pacific Corp. is anti-competitive and would cost shippers and consumers about $800 million in price increases, the U.S. Justice Department said.

In a filing with the federal Surface Transportation Board, which must approve the proposed merger, the Justice Department also said the companies vastly overstated the annual savings the merger would generate by claiming it would be $751 million.

The agency said the savings could be as high as $505 million and as little as $73 million annually.

The proposed merger would decrease the number of shipping options in many regions to one railroad from two, the Justice Department said, and could result in big rate hikes.

``The Department is concerned that this transaction will create monopolies or duopolies for crucial transportation services that industries and consumers depend upon throughout the U.S.,'' said Anne Bingaman, assistant attorney general at the Justice Department's antitrust division, in a statement. ``Only through competition can consumers be assured of the best price.''

While criticizing the merger, the Justice Department stopped short of opposing it. The agency said it won't take an official position until June 3, the deadline for interested parties to file comments.

The Justice Department's negative comments, however, represent a blow to Union Pacific and Southern Pacific, which already face heated opposition from many shippers and from several Southern states.

Most analysts still expect the Surface Transportation Board to approve the merger. Many, however, also expect mounting opposition to force the STB to attach conditions to its approval, such as requiring Union Pacific and Southern Pacific to sell some of their lines to competitors.

``That might be enough to kill the merger because Union Pacific would likely walk away from the deal,'' said Anthony Hatch, a railroad analyst at NatWest Securities in New York.

Robert Starzel, vice chairman of Southern Pacific, defended the proposed merger.

``The merger for Southern Pacific and Union Pacific is a necessary response to the merger of Burlington Northern and Santa Fe Pacific in 1995,'' Starzel said. ``It is the only way to assure competitive rail service in the West.''

Burlington Northern Inc. acquired Santa Fe Pacific Corp. last year for $4 billion, creating the nation's largest railroad.

In its comments, the Justice Department was also critical of an agreement by Union Pacific to sell track to Burlington Northern in exchange for support for the merger.

Union Pacific agreed to sell 335 miles of track in California to Burlington Northern Santa Fe Corp. and to share 3,800 miles of Union Pacific track on the Gulf Coast and in a portion of the western United States.

The Justice Department called the agreement ``inadequate'' to remedy the loss of competition created by the merger. It also said Burlington Northern would be forced to pay an excessive rate for the rights to share the track. The agreement also doesn't provide guarantees that Burlington Northern would maintain a high quality of service, the department said.

The department also attacked the railroads' claims that the merger would lead to substantial cost efficiencies.

``Union Pacific's and Southern Pacific's claimed efficiencies appear to be vastly overstated and insufficient to outweigh the probable rate increase,'' the agency said.