THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Thursday, October 24, 1996 TAG: 9610240327
SECTION: FRONT PAGE: A1 EDITION: FINAL
SOURCE: BY CHRISTOPHER DINSMORE, STAFF WRITER
LENGTH: 144 lines
Reacting to a major competitive threat, Norfolk Southern offered $1 billion more than rival CSX on Wednesday to buy Conrail and create the largest railroad east of the Mississippi River.
Norfolk Southern's $9.15 billion hostile bid would establish the nation's third-largest railroad with 25,500 miles of track and annual sales of nearly $9 billion.
Rail analysts think Norfolk Southern Corp. is well positioned to buy Conrail Inc. and win regulatory approval. It is smaller than CSX Corp. and the merger would result in more balanced competition among railroads in the East. Norfolk Southern is also dealing from a position of greater financial strength than CSX, they said.
``It would avoid the extreme market dominance that a CSX-Conrail combination would represent,'' said Norfolk Southern Chairman David R. Goode.
But the merger could cost Hampton Roads the Norfolk Southern headquarters. The railroad said it would be willing to consider relocating its headquarters from Norfolk to Conrail's home in Philadelphia. The railroad employs 300 people at the headquarters and another 1,500 work for the railroad in the region.
By breaking up the proposed merger of CSX and Conrail, Norfolk Southern hopes to avoid being put in a deep competitive hole.
Norfolk Southern is essentially going over the head of Conrail's board of directors and appealing directly to its shareholders by offering them $100 a share for their stock.
Norfolk Southern's uninvited offer could be just the first step in a drawn-out bidding war for Conrail. CSX could make a counter-offer, topping Norfolk Southern's bid, or Conrail's board could opt to negotiate a different merger agreement with Norfolk Southern.
``There are an infinite variety of ways this thing could work itself out,'' said Robert L. Banks, chief executive of R.L. Banks & Associates, a Washington-based railroad consultant.
``Whoever the losing suitor is is going to be in a poor competitive position,'' said Renee Johansen, a rail stock analyst with the Richmond brokerage Wheat First Butcher Singer.
Conrail reacted Wednesday with a statement saying its board of directors plans to review Norfolk Southern's offer. It added, however, that ``its board had already carefully considered the relative merits of a merger with Norfolk Southern rather than CSX and the board had unanimously determined that a merger with CSX was in the best interests of Conrail and its constituencies.''
Richmond-based CSX dismissed Norfolk Southern's offer as a ``highly conditional non-bid.''
``By every measure, the CSX-Conrail merger is superior in economic, efficiency and public policy terms to the Norfolk Southern non-bid,'' CSX said in a statement.
Norfolk Southern's proposal would link its strong network in the Southeast and Midwest with Conrail, which enjoys a near monopoly in many Northeast markets, particularly New York and Boston.
Norfolk Southern operates over 14,500 miles of track in 20 states and Ontario, Canada. Conrail has an 11,000-mile network in 12 northeastern and midwestern states, the District of Columbia, and Quebec.
Norfolk Southern and Conrail do not overlap nearly as much as CSX and Conrail do, so job losses could be less with a Norfolk Southern buyout.
Norfolk Southern had no projection of the potential impact on employees. The combined railroad would employ about 50,000.
``This is not a combination that is about head-count reductions,'' Goode said. ``It is about growth.''
Norfolk Southern and Conrail would be the nation's third-largest railroad behind the two western behemoths, Union Pacific Corp. and Burlington Northern Santa Fe Corp., both recently created by mergers.
The nation's railroads have been on a merger spree in the past few years, combining to provide better service to shippers with larger networks, increased efficiency and single-line service.
Norfolk Southern has been trying to buy Conrail since 1984, but it has been repeatedly turned away.
It first tried to buy Conrail, which was created by the federal government from the remains of several bankrupt Northeast railroads, in 1986 but the deal was blocked by Congress.
Norfolk Southern has since made repeated efforts to bring Conrail to the bargaining table. In a letter to Conrail's board released Wednesday, Goode said he called Conrail Chairman David LeVan about a merger as recently as Oct. 4, but was turned away.
``We regret that, despite knowing our long-term interest in joining Conrail with Norfolk Southern, your chairman ignored our longstanding offer to submit a business combination proposal to you,'' Goode said in the letter.
CSX and Conrail announced their proposed merger Oct. 15.
Norfolk Southern's offer of $100 would give Conrail shareholders about $12 more a share than CSX's offer.
CSX had offered $92.50 cash a share for 40 percent of Conrail's stock and stock worth about $84.50 a share at Wednesday's closing price for the remaining 60 percent of Conrail's stock.
The CSX offer was initially worth more, but its stock price has since fallen, pulling down the value of the total bid to about $8.1 billion from $8.4 billion.
Conrail stock soared nearly $11 a share Wednesday to $95 5/8 each in New York Stock Exchange trading. Norfolk Southern's stock declined slightly to $94 1/8 a share and CSX's stock fell 3/4 to $45 1/2 a share.
CSX's offer is subject to market uncertainties, Goode said.
Besides being worth more than CSX's bid for Conrail, Norfolk Southern's cash bid also rewards Conrail's shareholders more quickly.
Norfolk Southern is launching an immediate offer for all Conrail's stock.
Conrail's stock is largely held by institutional investors such as mutual funds and their interest is in maximizing returns for their own shareholders.
The stock that Norfolk Southern would get from its offer would be held in trust until the purchase is approved by federal regulators.
Norfolk Southern expects it could complete the transaction before the end of next year.
The transaction is contingent on the removal of all legal impediments, including Pennsylvania's tough anti-takeover law.
To that end, Norfolk Southern sued Conrail on Wednesday in federal court in Philadelphia to block several measures in the CSX-Conrail merger agreement designed to prevent a takeover by someone else.
One of those measures requires Conrail to pay CSX $300 million if their merger isn't consummated.
The outcome of the lawsuit may be uncertain, but Norfolk Southern believes it's worth the risk.
``We're confident this barrier can be overcome. . . '' Goode said. ``We'll use all the arrows in our legal quiver.'' MEMO: Norfolk Southern has good chance of winning war for Conrail/A11
[For a related story on the impact on the region, also see page A1.] ILLUSTRATION: GRAPHIC
NORFOLK SOUTHERN
HEADQUARTERS: NOFOLK
EMPLOYEES: 26,500 (1,800 in region)
MILES OF TRACK: 14,500
1995 REVENUE: $4.7 BILLION
U.S. RANKING: 4TH LARGEST
NORFOLK SOUTHERN W/CONRAIL
HEADQUARTERS: PHILADELPHIA OR NORFOLK
EMPLOYEES: 50,000
MILES OF TRACK: 25,500
1995 REVENUE: $9.0 BILLION
U.S. RANKING: 3RD LARGEST
BIDDING WAR
GRAPHIC
Map
AP
SOURCE: Companies
KEYWORDS: BIDDING WAR LAWSUIT CONRAIL NORFOLK SOUTHERN
CSX MERGER by CNB