ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Thursday, October 24, 1996 TAG: 9610240042
SECTION: VIRGINIA PAGE: A-1 EDITION: METRO
SOURCE: GREG EDWARDS STAFF WRITER
Norfolk Southern Corp. Wednesday went to battle with its longtime rival, CSX Corp., for ownership of Conrail, the massive railroad that would give the Virginia companies access to lucrative Northeastern markets.
NS said it plans to offer $100 a share for Conrail's common and preferred stock in an effort to gain a controlling interest in the company. If it accomplishes a merger, NS said, it will pay the remaining Conrail shareholders the same amount for their shares.
Such a deal would be worth $9.15 billion.
On Oct. 15, CSX and Conrail announced an agreement in which CSX would acquire Conrail for a combination of cash and CSX stock. That deal, based on the current value of CSX stock, would be worth about $1 billion less than the NS offer.
Either a CSX or NS merger with Conrail would create the nation's third-largest railroad in terms of track mileage. The combined annual revenues of NS and Conrail, however, are still less than those of CSX alone.
The Norfolk Southern proposal is "better on every point" than the CSX-Conrail agreement, said NS Chairman David Goode. A merger between NS and Conrail, he said, would create "a more balanced Eastern rail system" and would enhance rather than diminish competition in the rail industry. He made the comments at the company's quarterly meeting with securities analysts in New York.
At many places in the East, CSX is the only alternative to Conrail, and a combination of CSX and Conrail would give the combined railroad 70 percent of the freight traffic in the East, Goode said. He contrasted that with a merged NS and Conrail, which would have 60 percent of the market with much less overlap of routes.
Renee Johansen, a securities analyst with Wheat First Butcher Singer in Richmond, said a merger between NS and Conrail probably would win regulatory approval more easily than one between CSX and Conrail, because it would have less competitive impact. But she said a case could likely be made to federal regulators for either combination.
Goode said a merger with Conrail would provide much higher earnings growth for NS than it might attain on its own. NS shareholders, who don't have to approve a merger, would realize quickly that a union with Conrail is a good deal, he said.
NS said its $100-a-share offer for Conrail is a 13 percent improvement over CSX's bid. Conrail shareholders, NS said, could get money from NS immediately for their shares, because they would be held in a voting trust.
Asked what the effect of a merger would be on Conrail and NS employees, Goode said the merger was not about "head-count" reductions but about growth, increased business opportunities and the chance to capture freight traffic that is using north-south interstate highways.
Johansen, however, said any merger that claims savings in the hundreds millions of dollars, as both NS and CSX say they would achieve with Conrail, implies job reductions in areas of duplication, such as in customer service or repair shops.
Goode said NS already has commitments of $2 billion each from the Merrill Lynch and J.P. Morgan investment banks to finance an NS-Conrail deal. The remaining $5 billion also would be borrowed, he said. But in a letter to Conrail's board, Goode indicated NS might be willing to substitute NS stock for cash if that's what Conrail shareholders want.
Conrail advised its shareholders that they need not respond to NS' hostile offer. Conrail said it would review the NS offer, but said its board had already carefully considered the merits of a merger with NS rather than CSX and had unanimously agreed that CSX's offer is in the best interests of Conrail's shareholders, workers and customers.
CSX said the NS offer was no surprise and labeled it a "non-bid." The NS offer is not as good for Conrail's shareholders in the long run, CSX said, because it doesn't offer the tax-free equity and potential earnings growth that a Conrail-CSX marriage offers.
The NS bid would have to be approved by Conrail's board and would inevitably face delay, CSX said. CSX said its agreement with Conrail prevents Conrail's board from considering competing offers before April.
NS, however, filed suit in federal court in Philadelphia Wednesday to force Conrail's board to fulfill its duties to its shareholders. The suit also seeks to remove barriers in the Conrail-CSX agreement and in Pennsylvania law to an NS merger with Conrail. Pennsylvania's anti-takeover law requires any company in the state involved in a merger to consider the effects of the transaction on all the company's stakeholders, including workers.
Goode said NS was confident the legal barriers could be removed and NS could complete the merger in 1997.
In his letter to the Conrail board, Goode said NS would prefer to negotiate an agreement with Conrail than pursue a hostile takeover.
Goode also hinted at some of the hurt that NS officials felt as Conrail ignored its overtures in favor of a merger with CSX. NS has long sought a union with Conrail, which was formed by the federal government in the 1970s from several bankrupt Northern railroads.
NS first tried to buy Conrail when the government sought to return it to the private sector in the early 1980s, and rumors have surfaced periodically that the two were engaged in merger talks.
In his letter, Goode noted that NS management had spoken many times over many years with Conrail management about NS' desire to join the two companies. As recently as late September and Oct. 4, Goode said, he talked with Conrail Chairman David LeVan about NS's desire to make a concrete offer to the Conrail board.
"It came as a disappointment to me when it was announced on Oct. 15 that you had agreed to the proposed acquisition of Conrail by CSX Corp.," Goode wrote.
Goode said NS's cash offer directly to Conrail's shareholders would stand until Conrail's board decided to kill its agreement with CSX and enter a deal with NS. He said NS was prepared to offer significant representation to Conrail directors on the NS board and said Conrail management would have better opportunities at NS than at CSX.
Goode also said NS would consider moving its corporate headquarters from Norfolk to Philadelphia. CSX has already agreed to move its headquarters from Richmond to Philadelphia under its merger agreement with Conrail.
The potential loss of major corporate headquarters from Virginia has caused concern in Gov. George Allen's administration. But Robert Skunda, Virginia's Secretary of Commerce and Trade, said he couldn't comment on any actions the state is taking related to the two merger proposals.
"It's a concern anytime a company leaves Virginia and is very much the case when we have a company that's as fine a corporate citizen and a Fortune 500 company like NS," he said. He wouldn't consider the loss of corporate headquarters as a foregone conclusion, Skunda said.
LENGTH: Long : 123 lines ILLUSTRATION: PHOTO: CINDY PINKSTON/Staff. Business is unlikely to remain asby CNBusual in the NS railyards in Roanoke if the merger succeeds. NS on
Wednesday reported record earnings of $202 million for the quarter,
up 10 percent from last year. Story on B6. color. Chart & map by
staff/AP. color.