Henley Plans Proxy Fight to Elect Own Slate to SFSP Board

Taking another step toward possible control of Santa Fe Southern Pacific, Henley Group of La Jolla said Tuesday that it plans a proxy fight to elect an alternative slate of directors at SFSP’s annual shareholder meeting, which is tentatively set for April.

Although only five of SFSP’s 17 board directors are up for renomination at the meeting, one analyst said that if Henley Chairman Michael Dingman wins representation on the board it would demonstrate to SFSP management that he has “broad shareholder support.”

Henley also asked a Delaware court Tuesday for a judicial order enabling it to hold talks with Olympia & York Developments of Toronto to seek help in forming the slate of alternative SFSP board nominees. Henley disclosed Tuesday that it increased its stake in SFSP this month to 14.96% of total shares outstanding from the previous 14.7%. O&Y; owns 9.3% of SFSP shares.

Henley wants the court order to ensure that by joining forces with O&Y;, it will not trigger “flip-in” provisions of SFSP’s preferred stock purchase rights plan--a “poi son pill” defense adopted by SFSP last January and amended last month. The “flip-in” provision says that if any investor or group of investors acquires 20% of SFSP shares, all other shareholders could buy additional SFSP shares at a 50% discount.

Henley is concerned that by holding talks with O&Y;, it would create a “group” holding 24.26% of SFSP shares, triggering the flip-in provision and significantly diluting the voting and economic worth of its investment in SFSP.

In a filing Tuesday with the Securities and Exchange Commission, Henley said it has no current plans to make a tender offer or exchange offer for the SFSP shares it does not already own. That statement was a departure from previous statements in which Henley said it was considering such actions.

Restructuring Program

SFSP, a Chicago-based transportation, energy and real estate company whose principal businesses are the Atchison, Topeka & Santa Fe railroad and Southern Pacific railroad, declined to comment Tuesday on Henley’s move. O&Y; also declined to comment

In December, SFSP said it had broken off talks with both Henley and Olympia & York regarding possible business combinations or asset sales. In a separate filing at that time, Henley said SFSP rejected its merger offer consisting of cash and securities valued by one analyst at almost $7 billion, or $53 a share.

Embattled SFSP is in the midst of a restructuring program that it had hoped would satisfy restless shareholders. The plan, SFSP President Robert D. Krebs said last month, will generate a payout to shareholders of $4 billion--about $25 a share--in cash and/or securities to be distributed during the first quarter of this year. To raise the $4 billion, SFSP is selling assets and plans to borrow money.

The company announced last month that it has agreed to sell the Southern Pacific line to Denver-based Rio Grande Industries, parent of Denver & Rio Grande Western railroad, for $1.02 billion plus Rio Grande’s assumption of $800 million in Southern Pacific debt. The sale of one of SFSP’s two separately operated railroads was mandated by the Interstate Commerce Commission last June after it refused for a second time to allow the merger of the two lines.

SFSP also has sold, or is selling, its massive Santa Fe Pacific Timber operation as well as its Robert E. McKee general contracting company and its Banker’s Leasing and Financial Corp. SFSP said it will realize $680 million from the three deals. The company announced this week that it is selling two pipelines to Koch Industries of Wichita, Kan. Terms of the sale were not disclosed.

The restructuring apparently has not deterred Henley’s Chairman Dingman, who earlier said SFSP should be selling its Santa Fe rail line instead of SPT.

“Both Dingman and SFSP are reconciled to restructuring but have markedly different views as to what the optimal (restructuring) program is,” said Laurence Lytton, an analyst with the Drexel Burnham Lambert investment banking firm in New York.

The merger that formed SFSP in 1983 created a board with 30 members, but the size of the board has dwindled through retirements, including two last year. That reduced the number of directors to 17. There are no current plans to replace the retiring directors, a company spokesman said. Henley shares closed off 25 cents at $19.375 Tuesday, while SFSP shares closed up 50 cents at $44.875 a share.