
DATE: Monday, March 3, 1997                 TAG: 9703030063

SECTION: FRONT                   PAGE: A1   EDITION: FINAL 

SOURCE: BY CHRISTOPHER DINSMORE, STAFF WRITER 

                                            LENGTH:  123 lines

RAILROADS APPROACH MERGER DEAL

It doesn't happen very often in corporate takeover battles, but it's beginning to look like everyone will be a winner in the ongoing fight for Conrail.

Norfolk Southern, CSX and Conrail are on the verge of an agreement that would split Conrail's lines in the Northeast between the two Virginia-based railroads. Under the compromise, Conrail Inc. shareholders will likely get $115 for each of their shares, 62 percent more than the stock was trading for before the merger battle started.

``If that happens, everybody's a winner,'' said Charles Vincent, a rail stock analyst at PNC Financial Corp. in Philadelphia. ``If this happens, there will be no dominant player, so there's no loser.''

And if Philadelphia-based Conrail is broken up, Norfolk Southern Corp. would likely remain headquartered in Norfolk, retaining the region's only Fortune 500 company. It had offered to consider moving to Philadelphia to lure Conrail away from its merger partner, Richmond-based CSX Corp.

A Norfolk Southern spokesman declined Sunday to comment on a report in The Washington Post that they were close to a compromise agreement.

Conrail spokeswoman Chris Wagner said, ``It's really premature to talk about because there is no agreement.'' CSX officials could not be reached.

The negotiations are reportedly in a sensitive stage and could still fall apart. Conrail's board of directors must approve any agreement. Conrail Chairman David LeVan has repeatedly said that he and the board want to maintain Conrail's franchise, which gives the railroad a near-monopoly on rail service to big Northeastern markets like New York City.

``I think he had to bow to reality,'' Vincent said of LeVan.

The deal will likely be structured so that either Norfolk Southern or CSX will buy Conrail and sell certain rail lines to the other.

The pending agreement, which could be finalized and announced this week, comes five weeks after the railroads agreed to meet and four weeks after they first met and agreed not to talk about their negotiations.

At times in the past month, it didn't appear that the railroads were still talking as each side pressed for its own deals in the courts and with federal regulators.

``Some sort of economic reason had to prevail. . . ,'' Vincent said. ``These are rational businessmen, the kind of businessmen who lead this industry to success in the 21st century.''

Norfolk Southern and CSX compete throughout the Southeast and Midwest, and both have long wanted access to the big, lucrative markets served by Conrail.

Congress created Conrail in 1976 from the remains of six bankrupt railroads. Norfolk Southern tried to buy Conrail from the government in the mid-1980s, but was thwarted by Congress and Conrail was sold in a public stock offering. Norfolk Southern made another attempt to buy Conrail in 1994 and offered again last summer to talk about buying the railroad.

Conrail and CSX announced Oct. 15 that they had agreed to merge. Norfolk Southern launched a hostile offer for Conrail nine days later, topping the CSX deal by $1 billion. Conrail spurned Norfolk Southern's offer and a bidding war ensued.

Norfolk Southern is now offering $10.32 billion, or $115 a share, for Conrail, while the CSX merger is worth $9.45 billion, or $106 a share, to Conrail shareholders.

Splitting Conrail will likely create two evenly balanced railroads in the East, a competitive situation mirroring that in the West. Indeed, many say this merger battle is just a prelude to mergers that will create two transcontinental railroads in the United States.

By agreeing to break up Conrail, Norfolk Southern and CSX are also acceding to the warning issued in January by Linda Morgan, chairman of the Surface Transportation Board, the federal agency that must approve any railroad merger.

Morgan suggested the board would rather see an agreement that resulted in competitive balance in the East rather than a fight that might create a single dominant railroad with a weaker sister. She even suggested the board would impose a settlement.

If the CSX-Conrail merger had gone through, the combination would have controlled about 70 percent of rail freight east of the Mississippi River, while Norfolk Southern would have had the rest.

``This eases the way for STB approval,'' Vincent said. ``If they go to the STB and say this is our agreement, they can co-opt a lot of the expected opposition from shippers and others.''

Shippers, ports and states in the Northeast have long been eager for rail competition, and many have voiced concern about any single railroad taking over Conrail.

According to the Post article, Norfolk Southern, CSX and Conrail will split the four east-west lines in the Northeast now owned by CSX and Conrail.

CSX would keep its old Baltimore & Ohio route that links it to Pittsburgh and Cincinnati. It would also get the former New York Central line from New York to Albany and west to Buffalo, as well as the line between Albany and Boston.

Norfolk Southern would get the ``southern tier,'' a slower, mountainous route from New York to Buffalo via Binghamton, N.Y. Bill Schafer, Norfolk Southern's strategic planning director, said two weeks ago that that route could be upgraded easily.

Norfolk Southern also would take the Pennsylvania railroad's main line from Philadelphia to Pittsburgh and west, as well as the old Reading Railroad, linking New York and Philadelphia to Hagerstown, Md., where Norfolk Southern has long switched with Conrail.

``That fits very well with Norfolk Southern's existing route structure,'' Vincent said.

CSX would get a line north from Philadelphia, which it already reached from the south, to New York.

Norfolk Southern also hopes to take advantage of Conrail's rights to use the Amtrak route from Washington to New York, Schafer said. Since the 1987 collision between an Amtrak passenger train and a Conrail freight train that left 16 dead, that route has been underused, he said.

Norfolk Southern believes it can run high-speed intermodal trains up and down that corridor at night when Amtrak isn't using it as much, Schafer said. Intermodal trains carry truck trailers, a hybrid trailer/rail car known as a Roadrailer, and the shipping containers that can be readily moved between rail cars, ships and trucks.

A Conrail breakup will give Norfolk Southern and CSX significant revenue gains, Vincent said.

``And the Northeast finally gets real rail competition,'' he said. MEMO: Staff writer Christopher Dinsmore can be phoned at (757) 446-2271

or e-mailed at dins(AT)pilotonline.com ILLUSTRATION: GRAPHIC

[For a copy of the graphic, see microfilm for this date.]

BACKGROUND

ISSUES ON THE TABLE

WHAT'S NEXT

SPLITTING UP CONRAIL

JOHN EARLE/The Virginian-Pilot KEYWORDS: CONRAIL CSX NORFOLK SOUTHERN MERGER