ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Friday, January 10, 1997 TAG: 9701100077
SECTION: VIRGINIA PAGE: A-1 EDITION: METRO
SOURCE: GREG EDWARDS STAFF WRITER
It was two strikes and out when Norfolk Southern Corp. went to bat again Thursday in its contest with CSX Corp. for ownership of Conrail.
NS lost a pair of challenges - in federal district court in Philadelphia, and before the federal Surface Transportation Board in Washington - to a provision in CSX's merger agreement with Conrail that bars Conrail's board of directors from considering any merger proposal other than CSX's before 1999.
Norfolk Southern's twin losses came just nine days before a Jan. 17 meeting at which Conrail shareholders will be asked to approve CSX's offer. Although NS has offered more for Conrail's stock, shareholders might fear that further delay caused by NS' defeats Thursday could cost them money.
NS argued in court that the CSX-Conrail "lockout" provision violated Conrail shareholders' rights by not allowing them to consider merger offers other than CSX's. NS asked the court to enjoin the shareholders from meeting Jan.17, but U.S. District Judge Donald VanArtsdalen declined to strike down the provision or issue the injunction.
Norfolk Southern said immediately afterward that it was appealing VanArtsdalen's ruling to the U.S. 3rd Circuit Court of Appeals in Philadelphia and asking that the appeal be heard quickly.
"Regardless of the outcome of our appeal, Conrail shareholders will have an opportunity on Jan.17 to regain control of the corporation they own," NS said in a statement. By voting against the CSX-Conrail agreement, Conrail shareholders can signal the railroad's board that CSX's latest bid is unacceptable, NS said.
The Surface Transportation Board, which last year replaced the now-defunct Interstate Commerce Commission as the agency reviewing rail mergers, said in its decision that the two-year lockout period "appears excessive on its face" but ruled that NS was premature in bringing its case before the board.
Once an application for a CSX-Conrail merger is actually filed, the board might impose certain conditions or respond to appeals from NS or others that the board finds to be in the public interest, the board said.
The lockout provision in the CSX-Conrail agreement would not prevent the board from approving a competing merger application from Norfolk Southern or some other party, the board said in its decision. "A person cannot effectively preclude our approval of a transaction from going forward simply by entering into a contract that purports to prevent all alternatives to its own preferred outcome," the board said.
In mid-October, CSX, of Richmond, and Conrail, of Philadelphia, announced they had reached a merger agreement. Norfolk Southern, based in Norfolk, was surprised and miffed by the announcement because it had been pursuing a merger with Conrail for several years. NS responded with its own higher, hostile bid for Conrail later in October.
Both CSX and NS subsequently raised their bids. CSX's offer, which includes a combination of cash and CSX stock, is valued at $9 billion, or about $100 per share on average. Norfolk Southern's current all-cash offer is for $115 a share, a total of $10.3 billion.
Because it has the higher offer, NS has argued that Conrail shareholders should be given a fair chance to consider it. NS has been frustrated, though, by a Pennsylvania anti-takeover law that CSX and Conrail management have used to their advantage in structuring their merger agreement.
CSX Chairman John Snow said Thursday that his company was unwilling to raise its bid for Conrail. "We've exhausted our willingness to go higher," he said.
Snow's statement is an indication that CSX thinks its position is so strong that it doesn't have to raise the ante further, said Robert Bruner, a professor at the Darden Graduate School of Business Administration at the University of Virginia.
Bruner said Thursday's developments strengthen CSX's hand. The court and regulatory decisions will bind Conrail shareholders more tightly to CSX's bid because they lessen the potential that Norfolk Southern's bid will be allowed to proceed, he said.
Investors who believed Norfolk Southern's bid would be allowed to go through have to be disappointed, Bruner said. That's particularly true of those investors who were betting on the bidding war between CSX and NS, he said.
Investors seeking to make a profit from the contest for Conrail have pushed the price of its stock from $71 the day before the CSX-Conrail announcement to $99.75 a share Thursday, when it closed up 62 1/2 cents.
Bruner said he thinks Thursday's developments "spell the beginning of the end of hot action in Conrail stock."
NS stock stood at $88.75 a share, up $1.62 1/2, at the market's close Thursday. CSX stock closed at $43.75, up $1.37 1/2. A belief that the bidding war between CSX and NS is ending could account for their stocks' upward movement Thursday, Bruner said.
CSX and NS are interested in acquiring Conrail because it is the dominant carrier in the populous Northeast with access to the Port of New York.
The railroad that ends up with Conrail will become the ascendant carrier in the East. However, federal regulators almost certainly will require the merged railroad to divest itself of some of Conrail's routes or offer competitors trackage rights in the interest of maintaining rail competition.
NS has more than 3,000 employees in Roanoke, the most of any city within its 21-state system.
Bloomberg News Service contributed to this story.
LENGTH: Medium: 96 linesby CNB