THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Wednesday, October 16, 1996 TAG: 9610160401
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY CHRISTOPHER DINSMORE, STAFF WRITER
LENGTH: 96 lines
``We do not rule out any options.''
That's how Norfolk Southern Corp. responded to the news Tuesday of CSX Corp.'s proposed $8.4 billion merger with Conrail Inc.
``Norfolk Southern will act responsibly and aggressively to protect the interests of the shipping public, our shareholders and employees, and the communities we serve,'' the railroad said in a statement.
Norfolk Southern left no doubt that it would act, but the question is: How?
Rail stock analysts speculate that Norfolk Southern could try to buy Conrail, prompting a costly bidding war. Norfolk Southern also could try to block the merger by arguing to federal regulators that the deal stifles rail competition on the East Coast.
It also could vie for trackage rights or the outright sale of some CSX-Conrail lines.
Norfolk Southern might also jump into the arms of one of the two Western railroads, forming the first truly transcontinental railroad and trumping the CSX-Conrail merger, said Anthony Hatch, a rail analyst with NatWest Securities Corp. in New York.
Norfolk Southern's stock surged to a record high of $95 a share, a $3 gain, in trading Tuesday on the New York Stock Exchange.
Norfolk Southern has an extensive rail network covering 14,500 miles in the Southeast and Midwest. It employs more than 23,000 workers.
To preserve their pact, CSX and Conrail hope to find a way to placate Norfolk Southern.
CSX Chairman John Snow said he and Conrail Chairman David LeVan expect to sit down with Norfolk Southern officials and ``see if we can't accommodate their concerns.''
CSX and Conrail could grant Norfolk Southern trackage rights,similar to those received by the Burlington Northern Santa Fe Corp. through the September merger of Union Pacific Corp. and Southern Pacific Rail Corp., Snow said.
``We could see a constructive dialogue with (Norfolk Southern) evolving in this direction,'' Snow said.
But accommodating Norfolk Southern may not be enough, analysts said.
``I've got to believe Norfolk Southern is going to come in with a higher bid,'' said Charles Vincent, a rail stock analyst in Philadelphia with the institutional investment unit of PNC Financial Corp.
``Either that or they'll come in with some terribly convincing arguments why the merger is anti-competitive and shouldn't go through,'' Vincent said.
CSX's bid for Conrail represents a substantial premium on Conrail stock, said Cornelius V. Sewell of Argus Research, a New York stock analysis firm.
The premium was necessary because of the potential interest of other railroads, particularly Norfolk Southern, Sewell said.
Norfolk Southern twice before tried to buy Conrail, once in the 1980s when the federal government sold Conrail and again in the past few years. Congress turned down Norfolk Southern the first time, and Conrail's board and management rebuffed it recently.
Each time CSX adamantly opposed Norfolk Southern taking over Conrail.
During the latest round of rumors that Norfolk Southern would buy Conrail, Snow said CSX would be satisfied with nothing less than a major division of Conrail.
A bidding war could make buying Conrail too expensive for any one railroad, Vincent said.
Both railroads had their shot and CSX won, said Renee Jacobsen, a transportation analyst at the Richmond brokerage Wheat First Butcher Singer.
``They've both had 10 years,'' she said.
If CSX is allowed to purchase Conrail without concessions to Norfolk Southern, it could put the local railroad in a serious disadvantage.
``If CSX becomes larger it will become a much stronger competitor,'' Sewell said. ``It would leave Norfolk Southern as one of the small systems.''
Hatch, however, said Norfolk Southern's best option is to sit back and reap the benefits as these two companies struggle to merge with each other.
But the railroad may decide, instead, to merge with one of the two major western railroads, he said.
Rumors have been rampant recently that Burlington Northern Santa Fe Corp. was about to try to buy Norfolk Southern.
All rail mergers must be approved by the federal Surface Transportation Board. Railroads, shippers or anyone else opposing a merger will likely fight it there.
``I think they can put together a solid case defending the merger to the Surface Transportation Board,'' Jacobsen said.
Several analysts said the board would likely approve the merger, but force CSX and Conrail to grant trackage rights to competitors or even force an outright sale of some lines.
Conrail, formed by the federal government from the ashes of several bankrupted railroads, enjoys a near rail monopoly in big Northeastern markets like Boston and New York. This is an opportunity to break that up.
The timing couldn't be worse for a new rail merger, Hatch said.
A shippers group that will probably actively oppose the merger has coalesced because of two recent rail mergers that shrank the number of major western railroads to two from four, he said.
``They didn't like the first one; they actively opposed the second,'' Hatch said. ``They're really going to hate the this one.''
The group includes some of the nation's biggest shippers, like automotive manufacturers.
``We're not talking about some grain silo in the hinterlands,'' Hatch said. ``We're talking about'' General Motors Corp. by CNB