THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Sunday, October 20, 1996 TAG: 9610190463
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY CHRISTOPHER DINSMORE, STAFF WRITER
LENGTH: 122 lines
If CSX Corp. and Conrail Inc. merge as planned, Norfolk Southern Corp. will be the odd railroad out in the East.
CSX and Conrail, which announced an $8.1 billion merger Tuesday, believe they'll only need to provide Norfolk Southern with very limited trackage rights in the Northeast, analysts said.
If the merging railroads are right, the Norfolk-based company could find itself in the unenvied position of being the smallest by far of the nation's big four railroads.
It's a competitive hole that Norfolk Southern, widely regarded as the nation's best-run railroad, may not be able to dig itself out of without finding a merger partner of its own.
There are some compelling service-improvement and cost-cutting arguments driving the mergers sweeping the industry. Among them are stock market pressure to improve earnings growth. CSX-Conrail would be the third major merger in three years.
So, is it eat-or-be-eaten time for Norfolk Southern?
``Norfolk Southern is not going to be a loser in this situation,'' said Jeff Medford, a rail stock analyst with the Chicago brokerage William Blair & Co. ``They have a valuable franchise. . . . This is not going to hurt their business.''
Norfolk Southern's strategic position depends on the outcome of this merger, said Anthony Hatch, an analyst for NatWest Securities Corp. in New York. ``It depends on what kind of access that they get in the Northeast.''
Norfolk Southern officials, hard at work last week figuring out what their next move is, were unavailable to comment, spokesman Robert Fort said.
Norfolk Southern's chief spokesperson, Vice President Magda Ratajski, said Friday the railroad has no reason to support the merger and will likely oppose it.
Ratajski didn't say how, adding that the railroad has yet to develop a formal response, except to say it hasn't ruled out any options to make sure its interests are addressed.
Philadelphia-based Conrail has been pursued by both Norfolk Southern and Richmond-based CSX because of the near monopoly it enjoys in the Northeast. Conrail was created in the 1970s by the federal government from the remains of several bankrupt railroads. At the time creating a monopoly was less a concern to the government than ensuring rail service.
Most observers think Norfolk Southern will be able to make a compelling case for extensive concessions in the CSX-Conrail merger.
``Norfolk Southern will be getting some portion of the Conrail network through either trackage rights or outright sales,'' Medford said. ``The advantage for CSX is that it will be dealing the cards.''
But CSX and Conrail are also betting Norfolk Southern's case will fall on deaf ears, Hatch said.
Based on a recent federal ruling approving a major railroad merger in the West, they believe they will have to provide Norfolk Southern access to little of their combined 29,000 miles of tracks.
If that is so, Norfolk Southern would be frozen out of most of Northeast markets now monopolized by Conrail.
Conrail and CSX told analysts that they expect to only have to open rail access to between $250 million and $500 million of their combined $14 billion in annual business, Hatch said.
Norfolk Southern may also lose some business that it shared with Conrail to CSX to customers seeking the seamless service between the Northeast and the South of the merged railroads, Hatch said.
``Some people think that Norfolk Southern must therefore be a bidder for Conrail,'' Hatch said. ``I tend to have faith in them that one way or another they're going to work this thing out.''
Still Norfolk Southern may have no choice but to bull its way into the CSX-Conrail deal, or it could leap into the arms of a western railroad.
Robert Krebs, chief executive of Burlington Northern Santa Fe Corp., has said repeatedly that he expects a transcontinental railroad to be created within a few years.
``Rail mergers are likely to continue because they are a key tool in our quest to satisfy customers demands for flexible, quality transportation,'' Norfolk Southern Chairman David R. Goode said in a September speech. ``The shape of future mergers will be driven less by consolidation savings than by synergies necessary to provide high-level service.''
For Norfolk Southern the argument has two sides. Market pressures are immense, but it is already the most efficient railroad and regarded as the industry's best managed. It serves the fast-growing Southeast and the nation's industrial heartland in the Midwest.
It may not need to merge to continue to grow and provide value for its shareholders, some analysts say.
Company officials have said in the past that they believe they can provide competitive service through agreements with other railroads.
``Mergers are an important tool for improving service quality, but they aren't necessarily the entire answer,'' Goode said in the September speech. ``Railroads have a big responsibility to operate an efficient transportation system, and we will have to solve the service equation by working together, with or without mergers.''
For example, Norfolk Southern recently announced an agreement with the Wisconsin Central Railroad to provide ``run-through'' service from the Southeast to Wisconsin. The trains won't stop in Chicago to switch locomotives between the railroads in a time-consuming, profit-eating delay.
But the best way to avoid those delays is ownership. The major thrust behind railroad mergers is to provide seamless service, Medford said.
``There's a feeling that railroads can really take business back from the highways by leveraging their lower cost structure with higher quality service,'' Hatch said.
That's one reason CSX is buying Conrail - to provide seamless service between the Northeast and the South that is competitive with trucks.
Just as in the ongoing consolidation in other industries such as insurance and telecommunications, cost savings are another reason for rail mergers.
``There is huge amounts of duplication among railroads,'' Medford said.
The savings from cost-cutting, including employee cuts, can be greater than the extra business won by providing better service, Hatch said.
In announcing their proposed merger, CSX and Conrail said jobs would be eliminated. Combined the two railroads employ 52,000 people.
The last thing driving mergers is fear, Hatch said, fear that someone else is going to do it first and you'll be in a competitive hole.
``CSX-Conrail smacks of a pre-emptive strike,'' he said. ``CSX didn't want Norfolk Southern to get Conrail.'' ILLUSTRATION: Color photos
ODD MAN OUT?
Norfolk Southern Corp. would be in the unenvied position of being
the smallest by far of the nation's big four railroads if the
CSX-Conrail merger plays out as planned by the companies.
CSX and Conrail are betting that a recent federal ruling approving a
major railroad merger in the West means they will have to provide
Norfolk Southern access to little of their combined 29,000 miles of
tracks. by CNB