THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Friday, October 4, 1996 TAG: 9610040525
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY RIP WATSON, THE JOURNAL OF COMMERCE
LENGTH: 88 lines
Speculation that Norfolk Southern Corp. and Burlington Northern Santa Fe Corp. may be about to merge, creating the first true transcontinental railroad, has helped fuel a dramatic rise in Norfolk Southern's stock.
The Norfolk-based railroad's stock surged to a record high of $92.50 a share on Wednesday from the low-$80s a month ago. It closed at $91.75 a share Thursday.
Norfolk Southern's stock price has surged even as other railroad stocks barely moved.
Both Norfolk Southern and Burlington Northern declined to comment on their merger prospects.
``Norfolk Southern does not comment on any speculation,'' said Magda Ratajski, Norfolk Southern vice president.
If it ever happens, a merger of the Fort Worth, Texas-based Burlington Northern with Norfolk Southern would form a colossus with 45,000 miles of track, 75,000 workers, rail revenue exceeding $12 billion annually and operating profit approaching $3 billion. Measured by revenue, the Burlington Northern rail system is twice the size of Norfolk Southern.
The merger speculation is coming from some analysts, carrier officials, other industry insiders and employee groups. They believe the irresistible economic forces propelling other recent rail mergers are still at work. Merger rumors involving the two railroads have been circulating in recent weeks on the Internet.
Some believe Burlington Northern would offer $110 a share for Norfolk Southern stock, a 20 percent premium over its current trading price on the New York Stock Exchange. If those numbers are accurate, the transaction would be worth $14 billion.
Burlington Northern stock trades at about $84 a share, virtually unchanged from May but $4 to $5 higher than it was in late August.
One force that could be driving the process is a desire for the year-old Burlington Northern to get the jump on the just-merged Union Pacific and Southern Pacific, while those companies struggle to integrate their people, systems and equipment. The $5.4 billion Union Pacific Corp.-Southern Pacific deal wrested the title of largest U.S. railroad from Burlington Northern.
Several times in recent months, Burlington Northern Chairman Robert D. Krebs has signaled a general interest in further rail acquisitions in the near term.
He's not alone. Other railroad chief executives, including Norfolk Southern's David Goode, expect further industry consolidation.
``Rail mergers are likely to continue because they are a key tool in our quest to satisfy our customers' demands,'' Goode said in a September speech. ``Future mergers will be driven less by consolidation savings than by the synergies necessary to provide high-level service.''
The speculation regarding Norfolk Southern and Burlington Northern has the deal occurring as early as later this month to as late as some time next year.
One analyst said he was ``a bit befuddled'' at the recent, steady rise in Norfolk Southern stock. Not all are convinced it's based on merger expectations. Some on Wall Street attribute the increase to expectations of higher earnings at a time when other railroads are talking down their third-quarter results, which are due to be released later this month.
Burlington Northern and Santa Fe themselves merged last year and are busy integrating their systems. That could work against a near-term run at Norfolk Southern, some analysts believe.
Others believe the opportunity to merge the two railroads is so attractive that Burlington Northern is ready to move despite the challenges of the integration.
Another complicating point is that Burlington Northern supposedly is more interested in making a deal than Norfolk Southern.
Any future rail mergers will also face tough questions from competitors, customers and regulators.
Combining Norfolk Southern and Burlington Northern, for example, would compel CSX Corp. and Union Pacific to examine their situations. Conrail Inc. also would be on the hot seat. With its virtual monopoly in the Northeast, it could be very attractive to companies that go everywhere in the United States except the nation's largest consumer market in New York and surrounding states.
A transcontinental railroad could offer faster and more efficient transportation across the United States to customers, but it could also raise a number of competitive issues.
Some customers complained that, because of its size, the Union Pacific-Southern Pacific merger was anti-competitive.
The reaction led some observers to conclude that even larger mergers could spark a shipper backlash that could hurt the entire industry. That could take the form of a regulatory and legislative battle in Washington over future rail competition.
Based on the Surface Transportation Board's approval of the Union Pacific-Southern Pacific deal, future mergers likely will have to provide some mechanism for confronting anti-competitive issues head-on in order to be approved, industry officials said. by CNB