THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Thursday, August 4, 1994 TAG: 9408040585
SECTION: BUSINESS PAGE: D01 EDITION: FINAL
SOURCE: STAFF AND WIRE REPORT
LENGTH: Long : 112 lines
Norfolk Southern Corp.'s apparent interest in acquiring Conrail Inc. makes lots of sense and, to many rail stock analysts, comes as no surprise.
A merger between the two railroad powerhouses would create a monolith with more than 26,000 miles of track from Boston to New Orleans, and from Chicago to Jacksonville, with strengths in hauling coal and merchandise. Together, Norfolk Southern and Conrail would have a seamless north-south rail service up and down the East Coast, one of the nation's busiest cargo corridors.
``Strategically, it's a perfect fit between the two systems,'' said Graeme Anne Lidgerwood, CS First Boston railroad analyst.
Besides their extended geographic reach, both railroads are large carriers of coal and have big interests in ``intermodalism,'' a rapidly growing part of the industry in which railroads carry truck trailers over long distances to destinations where they are then delivered by local drivers.
By joining forces, the two carriers could achieve economies of scale, better compete with trucking companies and help solidify their stake in an industry that is heading for major consolidation.
A merger ``would be the first step for taking traffic off motor carriers in the Interstate 95 corridor,'' said Jeffrey S. Medford, a rail analyst with the Richmond brokerage Wheat First Butcher Singer.
Spokesmen for Conrail and Norfolk Southern declined to comment on the talks, which were first reported Wednesday in The Journal of Commerce.
Stocks of both railroads surged early Wednesday, but after a day of heavy trading, shares of Conrail ended $2.25 higher at $56.50, while Norfolk Southern's stock fell 12.5 cents a share, to $63.625.
Scott Flower, a transportation analyst at Kidder, Peabody, said that if an agreement were reached, it would likely be a stock swap. As the on-again, off-again courtship of these railroads suggests, a merger ``makes sense for all sorts of reasons,'' Flower added.
If true, the merger would be the third major railroad deal this summer. Burlington Northern Inc. and Santa Fe Pacific Corp. agreed in June to merge; last month, Illinois Central Corp. agreed to buy Kansas City Southern Industries' railroad.
Norfolk Southern Chairman and Chief Executive David Goode told Bloomberg Business News last week that the mergers sweeping the industry were being driven by competition and the need to offer better service.
``Everything that's going on in the railroad industry right now deals with service,'' he said. ``Clearly what's on the minds of all railroads is the ability to provide seamless service.''
When asked whether an Eastern railroad merger was possible, Goode pointed to Norfolk Southern's cooperative service arrangements, like its Triple Crown joint venture with Conrail, which markets transportation using a combination of trains and trucks.
``We've been doing it that way in the East'' as opposed to the Western railroad mergers, he said.
Amid reports that Norfolk Southern and Conrail were talking, CSX Intermodal announced an agreement with Norfolk Southern and a small New York railroad to set up a Chicago-to-New York service that will compete head-to-head with Conrail's main east-west service.
``It's a very fine deal for us because we don't have to use any of our terminal capacity and we operate two revenue-producing trains a day,'' said Thomas L. Finkbiner, Norfolk Southern's vice president of intermodal.
Now, Norfolk Southern and Conrail operate a joint daily service between New York and Atlanta that switches from one to the other in Hagerstown, Md. Seamless north-south service ``would provide us a better way of penetrating the underpenetrated north-south market,'' Finkbiner said.
Said analyst Medford: ``The best way to have seamless service is to have basically one company.''
Whatever happens, it will take a while. ``In my opinion, it's going to be years before such a merger could take place,'' Medford said.
With most other large railroads having merger applications pending before the Interstate Commerce Commission, a Norfolk Southern-Conrail merger could face opposition from shippers and from Richmond-based CSX.
Intervention by CSX could, at the very least, delay a merger for years, some analysts speculate. CSX officials declined to comment.
Steven Lewins, transportation analyst at Gruntal & Co., said he believes a Conrail-Norfolk Southern merger could be done ``if the appropriate concessions are made to CSX.'' In essence, that would be access to Conrail tracks to provide competition.
If CSX and Norfolk Southern lock horns over Conrail, it wouldn't be the first time.
Philadelphia-based Conrail was formed in 1976 by Congress through the consolidation of six bankrupt railroads to ensure rail transportation in the Northeast. As the government paid the bankrupt estates for their rail lines, it accumulated an 85 percent stake, with the other 15 percent held in an employee-stock ownership plan.
Many sought to buy the line, but then-Transportation Secretary Elizabeth Dole chose Norfolk Southern's $1.2 billion bid, which later was boosted to $1.9 billion. Critics complained the government invested more than $7 billion in Conrail.
Objections from labor unions, shippers, members of Congress and CSX eventually scuttled the sale after an intense 18 months of lobbying.
Michael Lloyd, railroad analyst at NatWest Securities, called those objections ``water under the bridge.'' ILLUSTRATION: Color photo
David Goode, Norfolk southern: ``Everything that's going on in the
railroad industry... deals with service. Clearly what's on the minds
of all railroads is the ability to provide seamless service.''
Stagff color map
NORFOLK SOUTHERN AND CONRAIL
How their routes would mesh
For copy of map, see microfilm
KEYWORDS: NORFOLK SOUTHERN CORP. CONRAIL
by CNB