Anschutz Corp.

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Anschutz Corp.

555 17th Street
Denver, Colorado 80202
U.S.A.
(303) 298-1000
Fax: (303) 298-8881

Private Company
Incorporated: 1958
Employees: 24,500
Sales: $2.80 billion
SICs: 1382 Oil & Gas Exploration Services; 4011 Railroads
Line-Haul Operating; 4213 Trucking except Local

Anschutz Corp., originally funded by the oil and gas holdings of Fred Anschutz, has since become a holding company for the diversified interests of Fred’s son, Philip F. Anschutz. Philip, consistently shunning publicity, quietly became a billionaire in the 1980s through his company’s various activities, including further oil and gas exploration ventures. He and the company became better known in the late 1980s and early 1990s for acquiring railroad lines, including the small Rio Grande Railroad and a railroad giant, Southern Pacific Rail Corp., which the Anschutz Corp. struggled to turn around but profited from through stock sales. Meanwhile, the company has ventured, with less fanfare, into stock investments, real estate, and art.

Fred Anschutz purchased land in Wyoming in the late 1950s, the worth of which was thought to be limited to range for cattle. He later discovered it was rich with oil. Philip Anschutz bought his father out in 1961. Anschutz Corp. bolstered its oil holdings and wealth further with the 1970s purchase of another oil-rich piece of real estate on the Wyoming-Utah border, known as Anschutz Ranch East. The land happened to be sitting atop one of the largest reserves of oil and gas in the United States. In 1982 the company sold a half-interest in the mineral rights on the ranch to the Mobil Oil Corp. for $500 million. Amoco has since operated the drilling operations there, paying the Anschutz Corp. a 17 percent royalty.

The Anschutz Corp. used this oil and gas wealth to venture into the stock market, downtown real estate (primarily in Denver), and, ultimately, the railroad industry. In the stock arena, Forbes reported that the company had gained more than $100 million through the purchase of stocks in ITT and Pennwalt in the 1980s, but such investments were not always so successful, as shown by the company’s involvement with Ideal Basic Industries.

At the time one of the largest companies in Colorado and a leading producer of cement and potash in the United States, Ideal was reeling from the recession of the early 1980s when Anschutz Corp. bought about 10 percent of Ideal’s outstanding stock in July 1983, then increased its share to nearly 25 percent about a year later—an investment totaling $61.5 million. The company reasoned that eventually, once the economy turned around, the investment would pay off. Ideal’s problems were compounded shortly thereafter, however, when they spent $347 million to purchase a cement plant in Mobile, Alabama, which it turned out they could not use because the limestone Ideal mined in Alabama was incompatible with the Mobile plant’s operation. The plant sat idle from 1984 to 1988. Ideal subsequently underwent a restructuring to avoid bankruptcy proceedings in late 1986. The Denver Post estimated that Anschutz Corp. faced a post-restructuring loss on its Ideal investment of between $15 million and $49.8 million, although the actual loss has never been reported. In 1989 the Wall Street Journal reported that Ideal was one of the ten worst stock performers of the 1980s, losing 92.43 percent of its value with a December 8, 1989, closing of $1.75.

The first major Anschutz Corp. venture into real estate began when it secured a 30 percent interest in all projects developed by the Oxford-AnsCo Development Co.—a subsidiary of a leading Canadian development company, Oxford Properties Inc.—for $1 million and downtown property owned by Anschutz in Denver and Colorado Springs. By the early 1980s, the company had developed several major skyscrapers in Denver, including the 56-story Republic Tower and the 39-story Anaconda Tower, worth an estimated $250 million. The relationship with Oxford-AnsCo soured when Anschutz gained the vast real estate holdings of the Denver & Rio Grande Railroad in 1984 and wanted to begin to develop real estate on its own rather than through the Oxford partnership. Late in 1984, the partnership was dissolved and the holdings divided between Anschutz and Oxford, with Anschutz keeping the Anaconda Tower (where the company’s offices are still located), Denver’s Fairmont Hotel, and a half-block of undeveloped land in Denver.

Anschutz’s first foray into the railroad business began with the 1984 purchase of the Denver & Rio Grande Railroad, commonly known as the Rio Grande, a small railroad that then consisted of more than 3,400 miles of track from Missouri to Utah. Anschutz Corp. purchased the Rio Grande’s parent, Rio Grande Industries, Inc., for $500 million, $90 million of which was in cash and the remainder in loans. This heavy debt load, coupled with competition from the Union Pacific line and several lost coal-hauling accounts, led to an approximate revenue loss of 20 percent over the first four years under Anschutz and a net loss of $1.8 million over an 11-month period in 1987 and 1988.

The Rio Grande’s small size and its position as a bridge carrier (providing connections between other rail lines) led Anschutz to pursue the acquisition of the railroad giant Southern Pacific (SP) in an attempt to save the much smaller Rio Grande. With 20,000 miles of track thoroughly covering the West Coast and a line through the southern United States to the Mississippi River, the SP was even more attractive to Anschutz for its connections to the Rio Grande lines in Kansas City and Ogden, Utah, making for a synergistic coupling.

Anschutz had to overcome a major hurdle to achieve its object of solidifying its railroad holdings. Santa Fe Industries Inc. had purchased Southern Pacific in 1983 with the intention of merging SP with the Atchison, Topeka & Santa Fe Railway (known as the Santa Fe), one of SP’s main competitors. The proposed merger elicited immediate opposition from government officials and Santa Fe’s competition, and with the added impetus of pressure from Philip Anschutz, whom Forbes called “politically influential,” the Interstate Commerce Commission in 1987 blocked the Santa Fe-SP merger as anticompetitive. Robert Krebs, the chairman of Santa Fe Industries, was forced to sell one of his lines and chose SP, which he felt was the weaker of the two.

Anschutz Corp. closed the deal for Southern Pacific in the fall of 1988. Similar to many other takeovers of the 1980s, Anschutz engineered a highly leveraged purchase in which Rio Grande Industries paid Santa Fe Industries just over $1 billion in cash, most of it borrowed, for SP, assuming more than $700 million in SP debt. After the deal, Anschutz controlled 71 percent of the Rio Grande, while Morgan Stanley as a minority partner controlled the remaining 19 percent through its purchase of $111 million in Rio Grande common stock. As William P. Barrett noted in Forbes, “Beyond the original cash stake in the Rio Grande, Anschutz put not a penny more into the deal,” thereby making the company’s president the first individual to own a major railroad in decades.

In the initial years after the purchase, Anschutz Corp. struggled to overcome the huge debt load, which had led to $100 million-plus interest payments each year, as well as the decline in SP’s traditional accounts in auto parts, lumber, and food; increased competition from Union Pacific and Santa Fe; and more rigorous safety inspections in California, where SP trains were involved in two chemical spills in July 1991. Amid speculation that he would be better off breaking up SP and selling it piecemeal (Krebs of the Santa Fe still coveted much of the SP line and approached Anschutz about a deal several times without success), Anschutz told Forbes: “I said in my original ICC filing that we would turn this railroad around; I’m in it for the long haul.”

To reduce the debt load, Anschutz Corp. sold large portions of Southern Pacific’s vast real estate holdings, more than $1 billion worth by the end of 1991 and nearly $400 million in 1992 alone. Anschutz also began to improve the quality of its service through heavy expenditures to maintain its track and hiring a quality expert, Kent Sterett, from its competitor Union Pacific. As trade between the United States and Mexico increased in the early 1990s, SP seemed best positioned to profit from it with its six Mexican gateways in California, Texas, and Arizona. Anschutz’s strategy appeared to be working as an operating loss of $347.7 million in 1991 had been reduced to $24.6 million in 1992. But in 1993, SP slid back to a loss of $149 million. Contributing to the loss was $14 million incurred from the settlement of a class-action lawsuit stemming from one of the 1991 derailments that had contaminated the Sacramento River with weed killer.

In the summer of 1993, Anschutz turned to a railroad company veteran, Edward Moyers, to assist in turning SP around. Moyers had retired after a very successful four-year stint at Illinois Central, where he cut its operating ratio (operating expenses as a percentage of revenues) from 98 percent to 71 percent. Anschutz hired Moyers as chief executive, and Moyers immediately focused on Southern Pacific’s operating ratio, which stood at 96.5 percent in 1993. The hiring enabled Anschutz to embark on a new and surprising strategy for a company that preferred to keep its dealings private: taking SP public.

In another effort to reduce the debt load, 30 million shares were offered in August 1993. Although the initial offering price was estimated at $20 per share, the actual price of the shares as issued was $13.50. Still, that the offering was successful at all was attributed by many to the hiring of Moyers. Investor interest in Southern Pacific increased in the several months that followed, so that by February 1994, when a second stock offering of 25 million shares was initiated, they sold for $19.75 per share. Following these sales, Anschutz owned 41 percent of the shares outstanding.

Moyers started a multi-pronged strategy for revitalizing Southern Pacific. First, he planned to cut costs by reducing the employee ranks through a buyout program and a reorganization. In his first year, he reduced the labor force by more than 3,000 to about 19,000 jobs. Second, Moyers focused on service to SP’s customers, putting pressure on his subordinates to improve the operations. This initiative saved a lucrative Georgia-Pacific account by increasing on-time Georgia-Pacific deliveries from zero to 80 percent in three months. Overall, on-time deliveries were up by more than 50 percent in his first year. Moyers also sought to bolster Southern Pacific’s equipment through the purchase of new locomotives, the rebuilding of existing locomotives, and better maintenance of both trains and track. Such improvements would lead to a more efficient operation, from which the savings could be passed on to SP customers, thus improving SP’s competitive position.

Another strategy emerged in late 1993 involving real estate and harkened back to Anschutz Corp.’s ongoing interest in real estate development. Rather than simply selling Southern Pacific land to raise cash, SP would invest in its land by becoming a developer. In a deal that S. David Steele, vice-president for corporate real estate, said would make SP “a major player in the Sacramento real estate market,” Anschutz and the mayor of Sacramento announced a downtown redevelopment venture called “Railyards” that would include offices, residences, stores, a hotel, and four parks, would double Sacramento’s downtown area by the year 2020, and would cost $1 billion. About a year later, Philip Anschutz was involved in the planning of another downtown development, this time in his base city of Denver. Anschutz Corp. and Comsat, owners of the National Basketball Association’s Denver Nuggets, developed a proposal for a $130 million sports and entertainment center that would include a new basketball and hockey arena and film and television studios. The center would be built on land to be purchased from Southern Pacific.

Meanwhile, the energy exploration side of Anschutz Corp. announced in late 1993 that it was forming Anschutz Exploration Corp. as an association of exploration consultants under the leadership of president John A. Masters, who had retired in 1992 after 20 years with Canadian Hunter and several major discoveries to his credit. The goal of the new company was to find cost-effective ways to drill for oil and gas in the lower 48 states at a time when the industry had largely abandoned such efforts as unprofitable. Anschutz Exploration intended to use the latest technology, such as electron microscopes, enlist local experts, and encourage innovative exploration techniques to achieve its goals. The full infrastructure of Anschutz Corp., including land, operations, finance, legal, and engineering, was to be made available to the new subsidiary.

Early 1994 saw another petroleum development with the agreement between Anschutz Corp. and subsidiaries of Chevron Corp. and Texaco Inc. to build the 130-mile Pacific Pipeline between Bakersfield, California, and Los Angeles under the newly formed Pacific Pipeline Systems Inc. The crude oil pipeline, to cost $150 million, would complete a route from the offshore oil rigs of Santa Barbara to the refineries in the Los Angeles area. According to the terms of the agreement, Anschutz owned 85 percent of Pacific Pipeline, Chevron 10 percent, and Texaco 5 percent.

The Anschutz Corp. also owned the highly respected Anschutz Collection of American West art, featuring more than 500 paintings by nearly 200 artists, including George Catlin, Asher Durand, Robert Henri, Thomas Moran, Georgia O’Keeffe, Jackson Pollock, Frederic Remington, and Charles Russell. Philip Anschutz, passionate about the American West, built the collection starting in the early 1960s and decided in the mid-1970s to allow others to enjoy the works of art through traveling exhibits.

Although Anschutz Corp. has steadily reduced its stake in the railroad business through the Southern Pacific stock sales, the mid-1990s still found the future of Anschutz tied closely to Southern Pacific. With Movers’s retirement from Southern Pacific early in 1995 for health reasons, the hiring of Jerry Davis (who had been executive vice-president and CEO with CSX Transportation Co.) to replace him, and rumors of further railroad consolidation (involving combinations of SP, Santa Fe, Burlington Northern, and Union Pacific), SP faced an uncertain future. Nonetheless, Anschutz Corp. had already recouped many times over its initial $90 million investment in its railroad empire. Henry Dubroff of the Denver Post estimated that through its SP stock sales, Anschutz “pocketed $350 million to $400 million in cash, before taxes.” The company seemed well positioned to move into other investments—the nascent Anschutz Exploration Corp., the downtown redevelopment proposals, and perhaps some new, not yet public, areas of investment.