RIO GRANDE'S RAIL PLAN INCLUDES MORGAN STANLEY

RIO GRANDE'S RAIL PLAN INCLUDES MORGAN STANLEY

Rio Grande Industries Inc. Monday submitted its plan to control the Southern Pacific Transportation Co. to the Interstate Commerce Commission and revealed that it would sell 25 percent of Southern Pacific stock to Morgan Stanley & Co. Inc.

In its filing, Rio Grande said it intended to retain all of the Southern Pacific's existing lines and virtually all of its employees in a new company division, SPHI.The assets of Rio Grande's subsidiary Denver & Rio Grande Western Railroad will be spun off to another new unit, RGHI. However, the operations of the two carriers will be fully combined if the ICC approves the merger, as expected.

Rio Grande was the winner of a hotly contested bidding war for the Southern Pacific. It agreed to pay $1.02 billion in cash and to assume $780 million in debt.

In its filing Monday, Rio Grande revealed that Morgan Stanley will play a major role in funding the deal.

The investment house will:

* Acquire 20 percent of Rio Grande's common stock in return for $111 million, through an existing investment pool it controls, the Morgan Stanley

Leveraged Equity Fund II, made up of large institutional investors.

* Place $200 million in subordinated debt against the Southern Pacific's assets for Rio Grande.

* Sell 5 percent of Rio Grande's common stock to investors who agree to spend $75 million for preferred stock in the holding company.

In addition, Security Pacific National Bank will provide $300 million for the transaction and will place another $400 million to a consortium of banks it has put together.

Security Pacific also has agreed to provide a $150 million line of credit for SPHI.

An existing $117 million line of credit for the Denver & Rio Grande Western will also be left in place, according to the filing.

Up to now, Rio Grande Industries has been completedly owned by the Anschutz Corp., which is believed to be owned entirely by Philip F. Anschutz, its president.

Mr. Anschutz shuns the public spotlight and has kept himself behind the scenes since acquiring Rio Grande Industries in 1984 for $500 million.

Sources report that one inducement to Mr. Anschutz for selling part of his company to Morgan Stanley is that it will help insulate him from demands by at least one unsuccessful Southern Pacific bidder that he publicly reveal his holdings and finances.

As part of its discovery proceedings request, attorneys for Kansas City Southern Industries Inc. have asked for details of Mr. Anschutz's holdings.

We are resisting that request, George W. Mayo Jr., a Hogan and Hartson attorney representing Rio Grande, said Monday. We don't think it has any relevance to the deal at hand, he said.

Kansas City Southern officials have stated their intention to ask the ICC to award them control of the Southern Pacific.

In its filing, the Rio Grande said the merger will enhance competition, improve service, reduce transportation costs, increase transportation efficiency and preserve essential transportation services - all to the benefit of the shippers and the public.

The Rio Grande predicted that combining the operations of the two railroads will save it more than $237 million a year and increase its net by about $74 million before taxes.

The company predicted it will attract an additional $124 million in business from other carriers, including more than $87 million a year from the Union Pacific, more than $26 million from the Burlington Northern and $8 million from the Atchison, Topeka & Santa Fe Railway.

According to Mr. Mayo, the Denver & Rio Grande traditionally has carried about 25 percent of the traffic on the so-called central corridor, through a joint solicitation agreement with the Southern Pacific.

That share has fallen to 18 percent, he said, due to shipper uncertainty over the future of the Southern Pacific, and to aggressive marketing by the Union Pacific.

The company expects to increase its share to 28 percent and re-establish the competition on the corridor after the merger, Mr. Mayo said.

The Southern Pacific has been operating under a trusteeship arrangement since 1983, when its merger with the Santa Fe was first proposed.

The ICC rejected the merger in 1986 and refused to reconsider it the next year. After that, the Santa Fe Southern Pacific Corp., the holding company for both railroads, decided to sell the Southern Pacific and invited bids.

In addition to Kansas City Southern, opposition to the sale has come from the Henley Group Inc., a California company that is the largest stockholder in SFSP and that is waging a proxy fight with the company's management for seats on its board.

The Union Pacific also has indicated that, despite its commanding position in the central corridor, it intends to ask the ICC for trackage rights to some points now served only by the Southern Pacific.