THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Friday, October 25, 1996 TAG: 9610250578
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY CHRISTOPHER DINSMORE, STAFF WRITER
LENGTH: 131 lines
Norfolk Southern Corp. believes it would start making money on its planned acquisition of Conrail Inc. within two years by means of cost savings and additional business, a company executive said Thursday.
Norfolk Southern, the Norfolk-based rail company operating throughout the Southeast and Midwest, offered $9.15 billion in cash Wednesday to buy Conrail, whose rail network is concentrated in the Northeast.
Norfolk Southern outbid CSX Corp., its Richmond rival, which reached an agreement last week to buy Philadelphia-based Conrail. Norfolk Southern's offer was $1 billion higher.
Buying Conrail would add tremendously to Norfolk Southern's debt. However, the debt load wouldn't cripple Norfolk Southern because the expected efficiencies would be so beneficial, said Henry C. ``Hank'' Wolf, executive vice president of finance.
Those efficiencies might include some savings from job reductions, although Wolf wouldn't disclose any anticipated cuts.
``If, in truth, this is a growth strategy and we're going to bring more business on, you need more people,'' he said.
It's also not part of Norfolk Southern's culture to conduct wholesale layoffs, he said. After the 1982 merger of Southern Railway and Norfolk & Western Railway that created Norfolk Southern, the number of jobs was reduced by attrition, early retirement offers and some buyouts.
Added Wolf: ``We have not gone out and just thrown people out the door.''
The purchase of Conrail would provide Norfolk Southern with access to key Northeastern markets. ``We're going to grow the business faster than we could as just Norfolk Southern,'' Wolf said.
If it wins the contest for Conrail, Norfolk Southern also would face a few lean years, he said, but the payoff for the company and its shareholders should roll in quickly.
Norfolk Southern began a tender offer for Conrail's stock on Thursday, offering shareholders $100 for each share they own. The offer expires Nov. 21.
CSX began a tender offer Oct. 16, the day after it announced a merger agreement with Conrail. It is offering $92.50 in cash for shares that amount to 19.9 percent of Conrail's stock. CSX's offer expires Nov. 15.
CSX said it plans to purchase 20.1 percent of Conrail's stock for the same $92.50 cash in a second tender offer. CSX would buy the remaining 60 percent when it consummates the merger next year with stock now worth nearly $82 per Conrail share based on CSX's closing price of $44 a share Thursday, down 1 1/2 in New York Stock Exchange trading.
In the meantime, Conrail shareholders have a choice: They can respond to either offer or hold onto their stock and hope for a better deal.
While Norfolk Southern's bid faces several hurdles, most analysts believe the company's sheer size weighs in its favor.
Still, the outcome is far from certain. Conrail might try to ignore Norfolk Southern's offer. CSX could make a higher bid. And shippers using Conrail's rail system have yet to weigh in.
Whichever bidder buys Conrail also must win the approval of federal regulators, who may seek to guarantee rail competition in the Northeast. Conrail has long enjoyed a virtual monopoly in major Northeastern markets such as New York and Boston.
``With CSX proposing to acquire Conrail, that would alter the competitive balance and create an imbalance, certainly a greater imbalance than a Norfolk Southern-Conrail combination,'' Wolf said.
Either company would have to take on considerable debt, but Norfolk Southern, with its all-cash offer, would be taking on much more than CSX.
Norfolk Southern plans to borrow $7.5 billion for its $9.15 billion effort to purchase Conrail. A merger would also add Conrail's $4 billion debt to its balance sheet.
Norfolk Southern is suspending its share repurchase program and plans to dedicate its funds to buying Conrail and paying down the added debt.
The purchase would boost Norfolk Southern's debt level from a modest $1.7 billion to $13.2 billion, or 72 percent of what the company would be worth to shareholders, Wolf said.
``At 75 percent we are working toward the investment-grade cusp,'' he added. ``We'll obviously do everything we can to retain investment grade.''
If Norfolk Southern's debt level were any higher, that debt might be considered high-risk by debt-rating agencies and make additional borrowing more costly. The first two years after the acquisition would be the most difficult, Wolf said. Norfolk Southern's income would dip 15 percent in 1997, compared to what the two companies would have earned standing alone.
``We're going to have to be real penny pinchers under this plan,'' he said.
But the merger's benefit - increased income - would start to kick in 1998 and really start to flow in 1999 and 2000, Wolf said.
``Any deal that's additive to income in the first year of operation . . . and very beneficial in the third one is a good one,'' said Anthony Hatch, a rail stock analyst with NatWest Securities Corp. in New York.
Norfolk Southern is confident that it will begin to generate the cash flow necessary to pay down the debt by $5 billion in the first five years of the merger.
``The cash that either one of these combinations would generate will allow them to quickly repay that debt,'' agreed Renee Johansen, a rail stock analyst with the Richmond brokerage Wheat First Butcher Singer.
The higher cash flow is expected to come from the combined companies' income from new business and cost savings.
Norfolk Southern estimates that in the year 2000 it would recognize a $660 million benefit from such ``synergies.''
A Norfolk Southern-Conrail combination would generate a projected $525 million in revenue that the two railroads don't have now, Wolf said. That, in turn, would add $145 million to operating income.
Revenue growth, he said, will come from such areas as the coal business, and increases in both short-haul traffic and intermodal volume.
The railroad's intermodal business involves hauling shipping containers and truck trailers between major markets.
Cost savings, meanwhile, will come from the elimination of duplication between the railroads, as well as savings in transport costs, equipment use and maintenance of tracks and terminals.
For example, the switching yards around Hagerstown, Md., where the two railroads meet, won't be necessary, Wolf said. Trains could run through the town, saving time and money.
The railroad estimates that it would save $515 million in 2000 from such cutbacks, Wolf said.
Wolf cautioned that his numbers are estimates because Norfolk Southern has not had access to Conrail's books.
Still, ``This is something that we have been working on for more than a decade,'' he said. ``It's not something that we have thrown together in a few weeks.'' ILLUSTRATION: If Norfolk Southern buys Conrail, some savings might
come from job cuts, said Henry C. Wolf, executive vice president of
finance at NS. But, he said, a growth strategy requires more people
- and wholesale layoffs aren't part of the railway's culture.
NORFOLK SOUTHERN'S PROJECTIONS FOR PROPOSED MERGER WITH CONRAIL
GRAPHIC
[For a copy of the graphic, see microfilm for this date.]
SOURCE: Henry C. Wolf, Norfolk Southern's executive vice president
of finance.
Artistic rendering provided by Norfolk Southern.
Graphic by ROBERT D. VOROS, text by CHRISTOPHER DINSMORE
The Virginian-Pilot
KEYWORDS: MERGER CONRAIL NORFOLK SOUTHERN CSX by CNB