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NY Times

SETBACKS AT SOUTHERN PACIFIC

Published: November 20, 1982

Much of the Southern Pacific Company's 13,740 miles of rail runs through areas of the Sun Belt that have exploded in growth over the last several years.

Thus, with grain and coal traffic growing rapidly throughout the region, the railroad's tonnage should have grown rapidly, too. But it didn't.

In fact, most of the new rail business generated in the West was picked up by such rivals as the Union Pacific and the Burlington Northern. And today the Southern Pacific, despite its advantageous location, is beset by major problems.


Hurt by Recession

The railroad has been hard-pressed by the recession, with traffic of auto parts and lumber and forest products down 25 percent to 30 percent. In the third quarter, the Southern Pacific had a pretax loss of $5.6 million, in contrast to a profit of $7.1 million in the third quarter last year. For the first nine months of this year, its net income plunged 40.2 percent.

And last month, the railroad decided that it could no longer accommodate the capital investment needs of its profitable, fast-growing communications subsidiaries, one of which operates the Sprint telephone network, and decided to sell them to the GTE Corporation for $750 million.

But chief among the company's worries, perhaps, is the competitive pressure it will feel if the recent merger of the Union Pacific with the Missouri Pacific and Western Pacific survives a court challenge and becomes reality. That combination, Southern Pacific says, could cost it $100 million a year in lost revenue.


Missed Opportunities

To some analysts, the Southern Pacific's recent history is a string of missed opportunities. Management, they say, has not been aggressive enough, and its diversifications have sometimes been badly timed.

They also say that the railroad's 66-year-old chairman and chief executive officer, B.F. Biaggini, who has headed the company since 1976, has tended not to delegate authority, sometimes causing ambitious executives to leave.

Mr. Biaggini, who went to work for the railroad in 1936 as a civil engineer, does not feel he has stifled his executive talent. But he says he does believe in ''centralized management - I want to know what's going on.''

In any event, Mr. Biaggini is optimistic about the railroad's future. He says it is ready to develop its natural resources and expand its activities in real estate.


Lagging in Development

Some analysts are less hopeful, based on the company's recent performance, that it will meet its problems effectively. Richard Fisher, the railroad analyst for Merrill Lynch, Pierce, Fenner & Smith, gave as an instance of Southern Pacific's poor timing the company's acquisition in 1979 of Ticor, a Los Angeles-based financial services concern whose main business is selling mortgage insurance. The acquisition came just before the housing industry went into a steep decline.

From pretax earnings of $26.4 million in 1980, the subsidiary's net income dropped to $10.9 million last year. In the third quarter this year, Ticor broke even, compared with income of $2.1 million in the 1981 period.

Other analysts note that while the railroad is rich in land, owning 3.7 million acres in the Southwest with mineral rights on another million acres, it has made only a modest effort to develop its holdings.

The Union Pacific, on the other hand, decided a decade ago to develop its natural resources and now derives about 60 percent of its earnings from these divisions, compared with 40 percent from its railroad. The Southern Pacific derives one-third of its pretax earnings from natural resources and about 40 percent from its railroad.

The Southern Pacific has limited most of its activity to leasing its gas and mineral properties to others. Only last year, it began the exploration and production of energy by reorganizing its subsidiary, the Bravo Oil Company, into a development company.


'Luck of the Draw'

Mr. Fisher noted, however, that much of the success of Southern Pacific's competitors in this field was ''the luck of the draw.''

''The land grants of the Union Pacific happen to have been in areas where there were significant discoveries of oil and gas,'' he said, ''while Southern Pacific did not have the good fortune to have gas and oil fields on its land grants.''

Nevertheless, Mr. Biaggini said during a recent interview in his New York office, the company plans to become more aggressive in developing its natural resources.

But first, he said, it had to get the $750 million from GTE for the Sprint system, which he said would not be available until about mid-1983. There are still major obstacles to completion of the sale. The transaction, now under Federal review, is being challenged by MCI Communications.

Mr. Biaggini said the company had decided to sell its communications subsidiaries - the Southern Pacific Communications Company and the Southern Pacific Satellite Company -because the next step in their development, the building of research and manufacturing plants, would have demanded large amounts of capital.


Capital Projects

Whether Southern Pacific will pursue an ambitious drilling and exploration program on its land has not been decided, Mr. Biaggini said.

Its Southern Pacific Land Company subsidiary has formed a joint venture with the Bishopsgate Coal Corporation to begin to develop coal reserves in Utah.

The other major area of spending, Mr. Biaggini said, would be expansion of Southern Pacific's extensive real estate projects. The company has already built several office buildings in downtown San Francisco. It also owns such projects as the Hilton Hotel in New Orleans and the Pacific Design Center in Los Angeles. The company's most ambitious project so far, announced last month, is the Mission Bay development in San Francisco, which is to be built on 195 acres of prime property.

John F. Kawa, a railroad analyst for Dean Witter Reynolds Inc., said, however, that such an investment project would not bring quick results, and quick results are what Southern Pacific needs.

And Mr. Biaggini, while optimistic over the long term, concedes that if the merger of the Union Pacific with the Western Pacific and Missouri Pacific goes through, his railroad will be put under considerable pressure.