THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Friday, March 1, 1996 TAG: 9603010435
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY DON PHILLIPS, THE WASHINGTON POST
DATELINE: WASHINGTON LENGTH: Medium: 71 lines
Norfolk Southern Corp. has abandoned its latest effort to acquire Conrail because a hostile takeover would be too expensive and the chances for success are slim, according to railroad-industry sources.
For almost two years, Norfolk-based NS has engaged in on-and-off talks with the Philadelphia-based Conrail to form a railroad system stretching from Florida to Canada. When Conrail Chairman David LeVan said his railroad was not interested, NS considered a possible hostile takeover, sources have reported.
But the sources said NS has decided that for now that route is not feasible because of a prohibitive purchase price, Pennsylvania's strict anti-takeover law and the problem of how the railroad could be divided with CSX Transportation Inc. without destroying Conrail's value to NS.
NS efforts to acquire Conrail began in 1987 when the federal government decided to divest its interest in the railroad. Congress formed Conrail in 1976 from lines of the Penn Central and other bankrupt Eastern railroads.
Norfolk Southern, which has never acknowledged discussing a Conrail merger or takeover, declined to comment. A Conrail spokesman also declined to comment.
Norfolk Southern signaled it has dropped the idea Jan. 23 when it announced a stock-repurchase plan for about 30 million shares at a cost of $2.9 billion by the year 2000. That effectively means that the railroad has decided to do something with its cash reserves other than make a bid for Conrail.
The cost of a takeover has risen dramatically in the last year as investors have bid up Conrail's price, partly in expectation of a bid. After trading in the mid-50s range early last year, Conrail's stock price has climbed steadily, closing Thursday at $72.12 1/2.
The premium that NS would have to add in a takeover battle could run the takeover price over $6 billion, sources said.
Some analysts have been saying for weeks that the possibility of a takeover was being overblown. Steve Lewins of Gruntal & Co. wrote on Dec. 16 that ``we stand against the mob on this one,'' and that the current round of Western railroad mergers is the last consolidation of the railroad industry at least into the next century.
In the East, there are three major rail systems. Conrail dominates the Northeast and has lines as far west as Chicago and St. Louis. NS and CSX Transportation serve roughly the same territory throughout the Southeast and Midwest, with some lines into the Northeast.
Lewins said a hostile bid for Conrail at this point also would raise anti-competitive issues. Even if NS was successful, rival CSX would demand large chunks of Conrail.
``There is no doubt the U.S. government would require that CSX get trackage rights all over Conrail in the Northeast if Norfolk Southern bought the company,'' Lewins said. ``That would reduce the value of the Conrail property to Norfolk Southern, probably causing its stock price to crater.''
CSX Chairman John Snow said in September that his railroad ``would be satisfied with nothing less than a major division'' of Conrail.
NS also faces dogged resistance from LeVan, who has vowed that Conrail will remain independent and has taken action to make it prohibitively expensive, including steps to shore up the railroad's stock price. He also has launched his own hostile takeover bid, trying to purchase a major Southern Pacific line from St. Louis to Texas if the Union Pacific-Southern Pacific merger is approved.
Pennsylvania's anti-takeover laws also work in LeVan's favor. But few believe LeVan will prevail for more than a few years.
``Eventually, Conrail will become part of the great transcontinental rail merger,'' Lewins said.
KEYWORDS: NORFOLK SOUTHERN by CNB