THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Wednesday, October 16, 1996 TAG: 9610160634
SECTION: FRONT PAGE: A1 EDITION: FINAL
SOURCE: BY CHRISTOPHER DINSMORE, STAFF WRITER
LENGTH: 113 lines
CSX Corp. will buy Conrail Inc. in an $8.4 billion deal creating the East Coast's largest railroad and one of the world's largest freight companies. The two railroads announced their proposed merger Tuesday morning.
The merger is bad news for Richmond, which will lose the CSX headquarters to Philadelphia, Conrail's hometown.
The proposed merger faces numerous hurdles, including possible opposition from Norfolk Southern Corp., a longtime CSX rival and would-be suitor of Conrail.
``This combination raises serious concerns. . . .,'' the Norfolk-based railroad said in statement Tuesday. ``Whatever happens in this process initiated by our competitor, Norfolk Southern will be a part of it.''
The merger would cement Conrail's rail monopoly in Northeast markets. But it will likely be opposed by some big railroad customers as being anti-competitive, analysts said. Railroad unions aren't likely to welcome the expected job cuts, either.
Both CSX and Conrail said there would be job losses as they merged and eliminated duplicate functions, but few specifics were provided.
Cuts are likely throughout both rail systems.
The biggest blow may be felt by Richmond, which would lose a Fortune 500 headquarters.
Conrail and CSX said some ``significant presence'' would be retained in Richmond, but it wouldn't be the prestigious headquarters.
``The headquarters office of CSX has never been incredibly large,'' said Renee Jacobsen, a transportation stock analyst with the Richmond brokerage Wheat First Butcher Singer. ``The railroad's presence is.''
CSX has a major rail yard and several repair and maintenance shops in Richmond. ``What happens to them seems to me to be more important to Richmond,'' Jacobsen said.
Under the proposed deal, CSX Chairman John Snow would be the chairman and chief executive of the merged company. Conrail Chairman David LeVan would become president. LeVan would succeed Snow as chief executive after two years. Snow would remain chairman for at least four years.
A CSX-Conrail merger would be the third major rail merger in as many years. Burlington Northern Inc. bought the Santa Fe Pacific Corp. in 1995 and Union Pacific Corp. completed its hard-fought purchase of the Southern Pacific Rail Corp. in September.
Railroads are combining to provide uninterrupted service to shippers by extending their reach and cutting costs.
``We will have the financial strength to make substantial infrastructure investments and service improvements. . . .'' Snow said. ``Together the companies will have stronger revenue, cash flow and earnings growth than they would have on their own.''
CSX and Conrail expect merging to save them $550 million a year through cost-cutting, job reductions and other economies of scale.
The announcement comes as a bit of a surprise because Snow had said two weeks ago that, while more consolidation in the industry was inevitable, nothing was imminent.
A merged CSX and Conrail would operate 29,645 miles of track in 22 states and serve most major markets east of the Mississippi River, including New York, Boston, Washington, Atlanta, Miami, New Orleans and Chicago. Annual sales would be nearly $14 billion.
``This is simply put a terrific marriage that benefits the shareholder, benefits the shipper and benefits the American public,'' Snow said. ``We're creating a transportation company for the 21st century.''
CSX serves the port of Hampton Roads with rail lines in Portsmouth and Newport News. It is also the parent of Sea-Land Service Inc., one of the world's largest marine shipping companies and operator of a single-berth container terminal in Portsmouth.
``I think CSX makes an ideal partner for Conrail in terms of the route structure and compatibility of management,'' said Charles Vincent, a rail stock analyst in Philadelphia with the institutional investment unit of PNC Financial Corp.
The merger must be approved by federal regulators and shareholders of both companies. The companies expect to consummate the union before the end of 1997.
While the merger will probably face a strong challenge, the Surface Transportation Board, the federal agency that will review it, will likely give its approval, Vincent said.
However, Vincent added, the board will likely require the combined company to provide access to some markets where it would be the only carrier.
Conrail, created by the federal government in the 1970s out of the remains of several bankrupted Northeast railroads, has long been a takeover target because of the near monopoly it enjoys in the big markets of the Northeast, New York in particular.
Norfolk Southern first tried to buy it in the mid-1980s from the federal government and again two years ago. Conrail's board rebuffed Norfolk Southern's advances in 1994 and declared that it intended to remain independent for the foreseeable future. But rumors of talks between the two railroads persisted until last winter.
Under the proposed terms of the deal, CSX would buy 40 percent of Conrail's common and preferred stock for $92.50 per share in cash. CSX would buy the remaining 60 percent of Conrail's common stock by issuing 1.85619 shares of its stock for each share of Conrail stock.
CSX stock fell $2.75 a share to $46.75 each in New York Stock Exchange trading Tuesday. That values the remaining 60 percent of Conrail's stock at nearly $87 a share.
Conrail's share price leaped $14.325 to close at $85.325 Tuesday. ILLUSTRATION: Graphic
WHAT CAN NORFOLK SOUTHERN DO?
Conrail has rebuffed several buyout attempts by Norfolk Southern.
Rumors of talks between the two railroads persisted until last
winter. Analysts say Norfolk Southern now could pursue several
options:
Try to buy Conrail outright, prompting a costly bidding war.
Try to block the merger by arguing to federal regulators that the
deal stifles rail competition on the East Coast.
Try to buy trackage rights or buy outright some CSX-Conrail
lines.
Try to join forces with a Western railroad, forming the first
truly transcontinental railroad and trumping the CSX-Conrail merger.
Details, D1 by CNB