Citicorp, NationsBank, and Credit Suisse rallied behind Union Pacific Corp.'s latest bid for Santa Fe Pacific Corp. with a new $3.7 billion loan that replaces a $2 billion loan issued just a month ago.
The stakes in the bidding war between Union Pacific and Burlington Northern for control of Santa Fe's valuable Chicago to Los Angeles lines continue to rise for both railroads and their banks.
Union Pacific plans to use its loan to finance last Wednesday's all-cash offer of $3.6 billion, valued at $18.50 per share.
To support Union Pacific's bid, the three banks invited the original 27 banks in the loan syndicate to a teleconferenced bank meeting last Friday. Only a handful of new banks were expected to join the larger loan.
Commitment levels reached about $3.8 billion for the original facility, the approximate amount of the new loan.
The three lead banks will divide the underwriting equally. The banks also plan to use the original pricing for the loan, with some minor modifications in the up-front fees.
The loan is divided into a five-year, $3 billion facility and a $700 million, one-year facility.
As eager as they have been to fund the merger, banks were almost shut out of the deal. The original merger arrangement signed last June by Burlington Northern and Santa Fe required no bank financing.
With this latest loan, however, banks have underwritten $5.76 billion of loans to the three railroad companies.
Burlington Northern has a $500 million loan led by Chemical Banking Corp., while Santa Fe itself has a $1.56 billion facility underwritten by J.P. Morgan & Co., Chemical, Chase Manhattan Corp., Union Bank of Switzerland, and Goldman, Sachs & Co. Morgan is administrative agent on the latter loan.
In some cases, banks have signed on to competing bids.
Only the Union Pacific loan is contingent on a successful merger.
Analysts are split in predicting the eventual winner of this high- profile railroad battle. At this point, however, the banking community appears willing to increase its commitment without limit, if that's what it takes to be on the winning side.
Burlington's most recent bid, made in mid-December, is more than 41% greater than its original offer, which was valued at about $2.7 billion.
"At some point, everybody begins to wonder if they're overpaying," said a banker supporting the largest of the three loans. "Right now, bankers are comfortable with this level."
Analysts believe that the condition of Union Pacific's balance sheet gives it a greater borrowing capacity than Burlington Northern. "With their current size and balance sheet, Union Pacific has a lot of capacity," said another banker.
Union Pacific's current bid is more than $2 per share less than Burlington Northern's. However, bankers point out that Union Pacific has made an all-cash offer, while Burlington is using a combination cash-stock offer.
Union Pacific has also established a trust to protect Santa Fe shareholders from a potential 30-month Interstate Commerce Commission review process. Burlington Northern has been unwilling to create such a trust.
Management clearly favors the bid from Burlington Northern, its original suitor. Santa Fe and Burlington Northern management teams are reportedly discussing a revised bid.
Santa Fe and Burlington Northern have once again postponed their shareholder meetings, to Feb. 7 from Jan. 27. "That meeting could be postponed again," added a banker.
"I don't think Burlington Northern and Santa Fe would be talking unless they thought this bid from Union Pacific was a threat," said Scott Flower, a railroad analyst at PaineWebber Inc.