THE VIRGINIAN-PILOT
Copyright (c) 1997, Landmark Communications, Inc.
DATE: Friday, January 10, 1997 TAG: 9701100507
SECTION: FRONT PAGE: A1 EDITION: FINAL
SOURCE: BY CHRISTOPHER DINSMORE, STAFF WRITER
LENGTH: 89 lines
PROVISION BLOCKING NORFOLK SOUTHERN'S OFFER FOR CONRAIL. WHAT DOES IT MEAN? NORFOLK SOUTHERN'S ONLY HOPE NOW IS TO PERSUADE CONRAIL SHAREHOLDERS TO REJECT THE CSX MERGER OFFER IN A JAN. 17 VOTE. MOST RAILROAD
OBSERVERS SAY THAT'S A LONG SHOT AFTER THE DECISIONS THURSDAY.
Norfolk Southern's $10.3 billion drive to grab Conrail from CSX suffered potentially mortal setbacks on Thursday.
Neither a federal judge nor a federal regulatory agency would throw out a provision blocking Norfolk Southern's offer for the Philadelphia-based railroad.
Conrail Inc. executives want to merge with Richmond-based CSX Corp., saying the $9 billion merger is in Conrail's best interests despite Norfolk Southern Corp.'s higher offer.
Now Norfolk Southern's hope of winning Conrail rests on persuading Conrail shareholders to reject the CSX merger offer in a Jan. 17 vote.
But most railroad observers say it's a long shot after the decisions Thursday.
Norfolk Southern has been battling for Conrail since October, when CSX and Conrail announced their merger, which would create the nation's third-largest railroad, dwarfing Norfolk Southern in the East. Norfolk Southern responded with a hostile takeover bid for Conrail worth $1 billion more than the CSX offer and has maintained that margin through two additional rounds of bidding.
Norfolk Southern has said it was willing to consider moving its headquarters to Philadelphia if Conrail would talk with it, but that is becoming increasingly unlikely.
Thursday's decisions preserve a provision in the CSX/Conrail merger agreement that prohibits Conrail from talking to other possible buyers until 1999.
``It's obviously more difficult to convince shareholders if they have to wait two years to see their money,'' said Larry Hammermesh, a law professor at Widener University School of Law in Wilmington, Del., who studies mergers.
However if Norfolk Southern succeeds and Conrail shareholders vote against letting the CSX merger continue, maybe CSX would allow Conrail to merge with Norfolk Southern for some significant concessions.
``I think if CSX gets voted down, they'll give up,'' said Barry Cohen, a senior managing director at the New York brokerage Bear Stearns.
``Why would any shareholder vote for CSX when their deal is worth $16, $17 (a share) less than Norfolk Southern's,'' Cohen added. ``This is real money. This is an enormous amount of money that they'd be forgoing if they voted for CSX.''
If it becomes apparent that Conrail shareholders aren't going to accept CSX's offer, Cohen said CSX will allow Conrail to be bought by Norfolk Southern in exchange for significant line sales and trackage rights.
Cohen's comments, however, run counter to conventional wisdom.
Even Norfolk Southern argued in court that the two-year prohibition on talking to other possible buyers effectively coerces Conrail shareholders to vote for the CSX deal in the upcoming vote.
Norfolk Southern immediately appealed the ruling to the 3rd U.S. Circuit Court of Appeals, which is also in Philadelphia.
In a statement Norfolk Southern said, ``Regardless of the outcome of our appeal, Conrail shareholders will have an opportunity on January 17 to regain control of the corporation they own.''
Norfolk Southern will continue to lobby shareholders to vote against the CSX merger and ``send a clear message to Conrail's board that CSX's latest bid is unacceptable.''
Whether such a message would be heard is unclear. CSX Chairman John Snow testified Thursday that his railroad's latest offer ``exhausted our willingness to go higher.''
CSX also said that Norfolk Southern's offer isn't an option in the vote. ``To put it simply, the January 17 shareholder choice is between the CSX transaction and no CSX transaction,'' CSX said in a court filing. ``It is not between the CSX transaction and the (Norfolk Southern) offer. It never has been.''
Besides permitting the two-year lockout to stand, U.S. District Judge Donald VanArtsdalen also rejected Norfolk Southern's argument that CSX had effectively gained control of more than 20 percent of Conrail's stock. If CSX had crossed that threshold, it would have triggered a Pennsylvania law requiring it to pay the same for remaining shares.
While the federal Surface Transportation Board also declined to intervene, Norfolk Southern took some solace in its comments.
The board, a regulatory agency that oversees rail merger issues, said the lockout provision would not preclude it from approving a merger of Norfolk Southern and Conrail or the consummation of such a merger, if approved.
Stock in all three railroads rose Thursday on the New York Stock Exchange. Norfolk Southern was up 1 5/8 to $88 3/4 a share, CSX rose 1 3/8 to $43 1/4 a share and Conrail increased 5/8 to $99 3/4 a share.
KEYWORDS: NORFOLK SOUTHERN CONRAIL CSX TAKEOVER BUYOUT