ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Wednesday, January 1, 1997 TAG: 9701020038
SECTION: BUSINESS PAGE: B-8 EDITION: HOLIDAY
SOURCE: DON PHILLIPS WASHINGTON POST
MANY EXPERTS SAY regulators will split Conrail between the two or politicians will reinstall regulations to prevent a monopoly.
At lunchtime on Friday, Oct. 11, an e-mail went to the CSX Corp. building in Richmond. From 9 a.m. to midnight, it said, no one could enter the building Saturday because tests would be conducted ``that will include the use of X-rays and other equipment.''
There were no X-rays or tests that weekend. Instead, there was a secret meeting of the CSX board. The meeting resulted in a decision that will reshape the railroad network throughout the East, affecting the bottom lines of business and industry and determining the prosperity or decline of such ports as New York and Baltimore.
As dawn broke the following Monday, the word went out. CSX, a worldwide shipping company that owns one of the Southeast's two major railroads, would merge with Conrail, which dominates railroading in the Northeast.
The news had its greatest impact in Norfolk, home of Norfolk Southern Corp., CSX's prime competitor. Norfolk Southern had been trying unsuccessfully to buy Conrail for more than a decade; its chairman, David Goode, had made several approaches to Conrail Chairman David LeVan. But poker-faced LeVan gave no hint that he already was talking to CSX Chairman John Snow.
The last call from Goode to LeVan came Oct. 7, but Conrail's board already had agreed 11 days earlier to authorize LeVan to make merger arrangements with CSX.
So on Oct. 23 Norfolk Southern launched its own hostile bid for Conrail to compete with the CSX offer.
The financial numbers are dizzying. CSX initially offered $8.4 billion in a blended stock and cash deal, with Norfolk Southern upping the ante to $9.1 billion, all in cash. The numbers have since risen to $9.35 billion and $10.4 billion, respectively, and either price would make it the biggest railroad deal ever. The highest previous offer for Conrail was $2.3 billion, made by Norfolk Southern in the mid-1980s.
There are fears in both government and the rail industry that the offering prices are so astronomical that money needed for future capital improvements on the railroads may go instead into the pockets of Wall Street arbitrageurs.
And there are fears in the rail industry that some major shippers, uneasy about the wave of mergers that already has reduced the number of major U.S. railroads to five, will use the battle over Conrail to justify new federal regulation.
The battle for Conrail apparently will be the final act in the restructuring of Eastern railroading, which began even before the old Penn Central went bankrupt in 1970. The government stepped in and created Conrail from the lines of the Penn Central and other bankrupt roads.
Then Conrail was sold to the public, transforming itself into an efficient organization that aided the revival of American manufacturing.
For the past decade, Conrail has enjoyed the same freedom from regulation the rest of the nation's railroads have, and all of the major rail companies have prospered mightily while reorganizing their systems.
There now are only two Western roads, Burlington Northern-Santa Fe Corp. and Union Pacific Corp., and three Eastern roads, seeking to become two through Conrail acquisition.
If all of Conrail goes to either CSX or Norfolk Southern, the winner would dominate railroading east of the Mississippi.
The situation exists because the mergers and bankruptcies that predated the government's creation of Conrail left it with a virtual monopoly on rail freight service to the Port of New York and with enormous strength in Pennsylvania, New Jersey and much of New England.
Goode said a Norfolk Southern-Conrail combination would have fewer competitive problems than a CSX-Conrail merger, and that Norfolk Southern would handle any problems by divesting a portion of Conrail to CSX.
Snow appears frustrated with the deadlock between Goode and LeVan. As a former federal transportation official and Washington lobbyist, he tends to seek compromise, not confrontation.
CSX sources said Snow believes that a large portion of a combined CSX-Conrail system eventually would have to be sold to Norfolk Southern. Snow has told insiders that the political process simply will not allow Conrail and CSX to combine intact.
Sources said Snow also believes that if one merged railroad is allowed to dominate the East, railroads will face the prospect of being re-regulated in terms of routes they can run and rates they can charge.
Shippers, for now, are keeping their powder dry. They are concerned about the ongoing battle, but many of them still believe some compromise will be reached.
``Most people assume that if a merger occurs, some consideration would have to be given to enhancing competition in the area, including New York,'' said Edward Emmett, president of the National Industrial Transportation League.
LENGTH: Medium: 91 lines ILLUSTRATION: PHOTO: AP. As their trains pass in a rail yard like joustingby CNBknights, CSX and Norfolk Southern are dueling for Conrail. color.