ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Thursday, February 6, 1997 TAG: 9702060033
SECTION: BUSINESS PAGE: B-6 EDITION: METRO
SOURCE: GREG EDWARDS STAFF WRITER
Conrail Inc. shareholders have offered to sell 80 percent of the company's stock to Norfolk Southern Corp., which recently offered to immediately buy 9.9 percent of the company.
However, Norfolk Southern can't take full advantage of the overwhelming response.
NS said Wednesday that its offer to pay $115 a share for 8.2 million Conrail shares had been oversubscribed. NS can't buy more than 9.9 percent without triggering a Conrail "poison pill" that would flood the market with new shares and dilute Norfolk Southern's holdings.
Last month, shareholders in the northeastern railroad defeated a proposal that, if approved, would have cleared the way for CSX Corp. of Richmond to proceed with a complex stock purchase plan that would, in effect, create a merger with Conrail. Before that vote, Norfolk Southern had promised to buy all the Conrail shares it could, if shareholders defeated the CSX proposal.
The deadline for Conrail shareholders to respond to Norfolk Southern' offer was midnight Tuesday.
NS will buy its 9.9 percent stake by purchasing a portion of stock for every shareholder who offered to sell. It will begin paying for the shares in about a week, after the final percentage of each seller's shares has been determined.
Michael Beall, a securities analyst with Davenport & Co. in Richmond, said the large number of shareholders responding to Norfolk Southern's offer was an indication that a large part of Conrail is now in the hands of professional stock traders, who are looking to "squeeze the best buck" they can from the situation.
"Conrail shareholders saw a pretty sure thing in taking $115 a share," said James Higgins of the New York firm of Donaldson, Lufkin & Jenrette. Norfolk Southern's offer was the "best game in town at this point," and people don't expect the bid for Conrail to go any higher, Higgins said.
Last October, the boards of directors of CSX and Conrail surprised the transportation industry by announcing plans to merge in a part cash, part stock-swap deal.
NS, which for more than a decade had sought to buy Conrail and its lucrative routes, countered with a hostile all-cash offer for the company.
Virginia rail giants CSX and NS, which have been longtime competitors in the South and Midwest, have since both raised their offers for Conrail stock. Norfolk Southern's all-cash bid is currently worth about $10.4 billion and CSX's roughly $9.5 billion.
NS spokesman Frank Brown called the large response by Conrail shareholders an indication of their interest in Norfolk Southern's bid for all of Conrail, which is also $115 per share. NS had expected support from Conrail shareholders, shippers, employees and others, Brown said.
But a key factor in the deal came last month, when Linda Morgan, chairman of the federal Surface Transportation Board, warned that it would not approve either merger unless it maintained competition among Eastern railroads. The Surface Transportation Board regulates the nation's railroads and must approve any merger.
After her warning and Norfolk Southern's victory in the Conrail shareholders meeting, CSX and Conrail managers accepted an invitation from Norfolk Southern to discuss a division of Conrail between CSX and NS that would be acceptable to all sides.
In developments related to the battle for Conrail, two top national debt rating agencies have lowered ratings of Norfolk Southern and CSX debt.
Moody's Investors Service dropped Norfolk Southern's debt rating Tuesday to A1 from its top rating of Aaa3, and Standard & Poor's last week lowered the rating on $1.2 billion of NS debt from AA to AA-minus. Moody's downgraded CSX's senior unsecured debt from A3 to Baa1 on Tuesday.
Lowering a company's debt rating can mean the company will have to pay higher interest rates to borrow money. Moody's said the competition for Conrail could weaken both CSX and NS.
Henry Wolf, Norfolk Southern's executive vice president for finance, noted that NS has the best credit ratings in the railroad industry, even after the downgrades.
The downgrading of the two companies' bond ratings was not that surprising, Higgins said. "You can't be that aggressive and not impact your bond rating."
The Associated Press contributed information to this story.
LENGTH: Medium: 80 linesby CNB