Pacer Deal Offers Opportunity for Union Pacific

Pacer International's deal with the Union Pacific Railroad to accelerate its shift to door-to-door intermodal services also may accelerate realization of a Union Pacific (UP) pricing opportunity, says William Greene, Morgan Stanley Research. “UP's early renegotiation of part of its Pacer contract could add a net $0.07 - $0.10 or more to 2010 consensus [earnings] estimates despite the fact that the full economics of the contract renegotiation will not be felt until 2011 due to certain UP concessions.”

“Pacer, a major UP intermodal customer accounting for nearly all of UP's 2011 legacy re-pricing opportunity (or ~5% of revenue by our estimate), announced an early renegotiation of a major portion of its legacy contract (vs. Oct 2011). As a result, UP is likely to benefit from both substantial re-pricing and greater fuel surcharge coverage,” Greene added.

Some key items of the deal take effect immediately, including a nearly $250 million in wholesale intermodal traffic that will transition from Pacer to UP by end of the first quarter of 2010. Higher rates on domestic big-box intermodal business, with rates gradually increasing to market competitive levels by the end of 2011, added the Morgan Stanley report. Pacer will de-emphasize its use of Burlington Northern Santa Fe Railroad (which it was announced would be sold to Warren Buffett's Berkshire Hathaway group). Pacer will also receive a $30million, one-time cash payment. Under a shared equipment agreement. Pacer's international, auto, and ACR intermodal business will continue to operate under its existing legacy contract. Thus, UP's economics are likely to further improve in 2011 when the entire Pacer portfolio is marked-to-market, concluded Morgan Stanley.