ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Friday, April 4, 1997 TAG: 9704040097
SECTION: BUSINESS PAGE: 1 EDITION: METRO
COLUMN: rail money
SOURCE: MAG POFF
When we want to buy a new car or to replace a major household appliance, most of us are forced to arrange a loan - a line of installment credit - to finance the deal.
Norfolk Southern Corp., which often is referred to as "cash-rich," is in a similar situation as it negotiates a multibillion-dollar purchase of parts of Conrail Inc. NS, it turns out, is much like us.
Watching such a big deal take shape is an interesting lesson in the complexities and simplicity of financing a purchase.
The railroad is relying on the sale of bonds to raise the cash to buy a share of Conrail's northeastern freight rail network, which NS likely will split with Richmond-based CSX Corp.
The railroad last month registered with the Securities and Exchange Commission for the sale of bonds worth $4.3billion. The bonds can be sold as the money is needed. The registration was required because Norfolk Southern is a public company and shareholders have a right to know about things that affect their investments.
Can NS carry the debt?|
Norfolk Southern already has paid $943million for a 9.9percent stake in Conrail. If it sells all the bonds it has registered, its cost of buying part of Conrail ultimately will be $5.25billion.
There has been speculation that the railroad might be planning to supplement the sale of bonds with either cash on hand or the sale of some common stock or both.
But how would that affect current shareholders, many of whom live in the Roanoke Valley? Can even Norfolk Southern afford a cost in the billions to buy a piece of Conrail?
Two securities analysts who follow the company answer yes.
Andrew Reitenbach, who watches Norfolk Southern for Value Line in New York, said issuing that amount of debt will dilute the value of its stock in the short term.
Although Reitenbach has yet to run the numbers, repaying the debt will "take a bite out of earnings."
But in the long term, he said, buying Conrail's facilities "will add incrementally to profits." Over a period of time, which is what investors should be watching, the purchase "should propel its stock price up," he said.
He said Norfolk Southern's piece of the pie will be "an excellent fit with its existing tracks." The company will get roughly half of Conrail's 11,000-mile system. Reitenbach predicted that Norfolk Southern will acquire the high-speed Chicago-Cleveland-Pittsburgh-Philadelphia line, one of Conrail's most active routes.
Bonds called safe route|
"Once the dust has settled," he said, "we think Norfolk [Southern] will come out on top." It will gain access to New York City markets "without overleveraging its balance sheet as it would have done if it paid the original $10.5 [billion] for all of Conrail."
Norfolk Southern is well-run, he said, so it should be able to realize benefits from its prize faster than most.
Still, Reitenbach said, "these shares are best suited for longer-term investors."
Brian Routledge, railroad analyst for Prudential Securities in New York, called $5.25billion "a significant amount of money" for any company.
But Routledge said Norfolk Southern has an excellent balance sheet and is in good financial condition. "It has the best balance sheet in the railroad industry."
He suspects the company has been "saving up for a rainy day like this," socking cash away against the possibility of someday acquiring some or all of Conrail.
Even $5.25billion, Routledge said, is an amount Norfolk Southern "should be comfortable with."
At the same time, he said, that should be the peak amount that most analysts expect Norfolk Southern to pay for roughly half of Conrail. He and others would be surprised to see Norfolk Southern issue still more debt.
The $5.25billion, he said, does not give Norfolk Southern much more room to finance the purchase of Conrail.
Debts such as bonds are much less expensive for any company than issuing stock would be, Routledge said. Generally, bonds are issued at fixed interest rates and maturity dates, meaning the company and investors can predict how much the borrowing will cost and when it must be repaid. The value of stock, on the other hand, can change day by day and probably suggests a long-term stake in the company. Recently, NS common stock has traded at about $87 a share.
"I would be surprised if they issued any more stock" to finance the purchase of Conrail, Routledge said.
LENGTH: Medium: 89 linesby CNB