THE VIRGINIAN-PILOT
Copyright (c) 1997, Landmark Communications, Inc.
DATE: Friday, January 17, 1997 TAG: 9701180414
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY CHRISTOPHER DINSMORE, STAFF WRITER
LENGTH: 118 lines
Conrail Inc. shareholders gather at noon today at the Academy of Music in Philadelphia to determine the fate of their company.
They are voting on whether to merge with CSX Corp. But what they're really deciding is whether to accept CSX's $9.3-billion merger offer or hold out for Norfolk Southern Corp.'s competing $10.3-billion bid.
The vote brings to a head the nearly four months of battling for Conrail. The winner of the Philadelphia-based freight railroad could become the dominant railroad in the Eastern United States.
Norfolk Southern, headquartered in downtown Norfolk, is the region's only Fortune 500 company. Its executives have been leaders in the community and frequent donors to civic projects. The company employs 1,800 people in Hampton Roads and thousands more throughout the state.
Norfolk Southern has said it would consider moving its headquarters to Philadelphia if that's what it takes to get the deal done. But as prolonged and acrimonious as the battle has been, it seems unlikely.
CSX has committed to moving its headquarters from Richmond.
Both sides are expressing cautious optimism about today's shareholder vote. Most rail analysts say it's too close to call.
``On Friday Conrail shareholders will have a chance to take control of their corporation and send a message to Conrail's board that they are not willing to have an inferior offer crammed down their throats,'' said Henry C. Wolf, Norfolk Southern executive vice president and chief financial officer. ``It's our hope and expectation that that will be the message they send.''
Despite Norfolk Southern's richer bid, Conrail says it prefers CSX and that a merger with the Richmond-based railroad is a superior combination.
A vote for the CSX merger virtually assures CSX's control of Conrail. It will be able to go ahead and buy up to 40 percent of Conrail's stock, setting the stage for a quick consummation of the merger.
A vote against the CSX merger could result in a prolonged stalemate.
Conrail says it will schedule another vote if it loses. Whatever the outcome, CSX has said it will not raise its offer to help sway shareholders.
``If we lose it, I think it's going to be `shame on us' for not having communicated fully the benefits of this merger,'' CSX Chairman John Snow told Reuters news service this week. ``What I propose doing, if we lost it . . . would be to take our time, and patiently go around and talk to the shareholders. That may take three months, that may take six months.''
Norfolk Southern has other ideas.
``The most likely scenario is that a `no' vote of the shareholders would force the Conrail board to seek a settlement,'' Wolf said.
``Objectively, there is little likelihood of this being resolved in the short-term without some negotiated resolution among Conrail, CSX and Norfolk Southern,'' Wolf added. ``From the standpoint of the Conrail shareholder, the sooner that occurs the better.''
PaineWebber analyst Scott Flower agrees with Wolf. ``It would seem like reasonable businessmen would conclude, if the transaction's not going forward, that it's time to sit down and try to reach some kind of agreement,'' Flower said. ``These are all reasonable businessmen.''
Meanwhile both CSX and Norfolk Southern plan to file competing applications with federal regulators to take over Conrail. Even if it loses the shareholder vote, Norfolk Southern believes it has a chance with the Surface Transportation Board.
``The battle quickly turns to the regulatory front where we can expect another bitter public battle,'' said Brian Routledge, a rail stock analyst with Prudential Securities in New York.
Routledge and other analysts expect a close vote.
``It's too close to call,'' agreed Cornelius Sewell, a transportation analyst with Argus Research in New York.
Some analysts, however, expect shareholders to vote against the CSX merger, especially since Norfolk Southern said Monday it would buy 9.9 percent of Conrail's stock if shareholders vote down the CSX merger.
``Norfolk's going to walk away with it,'' predicted an analyst at NatWest Securities Corp. in New York.
``Norfolk probably has a slight edge going in to the vote,'' Flower said.
Even Conrail and CSX foresee a tight vote.
``We are reasonably confident,'' said Bob Sullivan, a Conrail spokesman. ``At the same time, we expect it to be close.''
CSX owns nearly 20 percent of Conrail's stock and will vote for its own deal.
Conrail's employees control another 13 percent and will likely side with CSX too. Norfolk Southern has been wooing them with newspaper advertisements saying more will lose their jobs in a CSX merger.
With nearly 33 percent of the vote in hand, CSX needs about 25 percent of the remaining votes cast to win.
Institutions, such as pension funds, insurance companies and mutual funds, own about 40 percent of Conrail's stock, Wolf said. ``The institutions are the ones that are really infuriated,'' he said.
Arbitrage firms own more than 20 percent of Conrail's stock as well, Wolf said. These investment companies get involved in takeover battles seeking top dollar. ``As the arbs come in, their thirst is for our $115 (a share) offer,'' Wolf said.
Individual investors hold about 5 percent of Conrail stock. Most cashed out as Conrail's stock soared from less than $70 a share before the takeover battle began to more than $100.
Norfolk Southern's $943 million offer to buy 9.9 percent of Conrail's stock on a ``no'' vote may be enough of a carrot to win over some fence-sitting shareholders.
Even if Norfolk Southern wins, the CSX/Conrail merger agreement bristles with huge impediments designed to make any other offer for Conrail difficult, if not impossible.
Those impediments include a lock-out agreement that CSX and Conrail say prevents Conrail from talking to other buyers until 1999. And there is also a so-called ``poison pill'' provision that would make buying Conrail too expensive for Norfolk Southern until after 2002.
Both the lock-out and the poison pill can be removed by Conrail's board of directors, Wolf said.
A ``no'' vote will trigger a Norfolk Southern effort to oust Conrail's current board at the next annual meeting, which has historically been held in May.
However, any new board would have to retain at least two of Conrail's current directors to take down the poison pill, Wolf said.
``I think there are several directors that are somewhat concerned,'' Wolf said. ``Some of those directors are going to say, `I don't want my good name associated with this kind of thing.' '' MEMO: PILOT ONLINE: Previous coverage of the Conrail merger plus related
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KEYWORDS: CONRAIL CSX NORFOLK SOUTHERN
MERGER