ROANOKE TIMES
Copyright (c) 1995, Roanoke Times
DATE: Sunday, December 10, 1995 TAG: 9512080031
SECTION: BUSINESS PAGE: G-1 EDITION: METRO
COLUMN: RAILROADS
SOURCE: GREG EDWARDS
The oft-rumored merger of Norfolk Southern Corp. and Consolidated Rail Corp. might be a marriage made in railroad heaven. But don't be surprised if the "Thoroughbred of Transportation" has a fling with a little filly named Florida East Coast Railway before it settles down with Conrail.
A week and a half ago, Conrail stock jumped more than $4.50 a share in a single day, apparently because of a recurring rumor that the railroad was on the verge of merging with NS. There was no merger announcement; the stock lost most of that gain the following day.
Merger talk surrounding NS and Philadelphia-based Conrail has waxed and waned since the mid-1980s when Norfolk Southern's bid for government-owned Conrail beat out those of 13 other railroads. Ultimately, Congress rejected the deal and decided to sell Conrail's stock to the public instead.
In August last year, the Journal of Commerce reported that NS and Conrail executives were talking. A month later, however, the trade newspaper reported that the never-confirmed merger talks had broken off.
Because of the merger earlier this year of Burlington Northern Railroad Co. and Atchison, Topeka and Santa Fe Railway Co., and an announced agreement between Union Pacific Corp. and Southern Pacific Rail Corp., the topic of a possible marriage of NS and Conrail was raised again.
The rumors are persistent because the two railroads, in fact, would make a good match: NS operates in the Southeast, the smaller Conrail operates in the Northeast, and both operate in the Midwest. Together they would be a formidable East Coast transportation company that would provide NS with the direct access to the populous Northeast and its ports that it now lacks. The two roads are already cooperating closely in the exchange of freight, but a merger could create efficiencies and improve inter-regional service, which could help the business of both.
Conrail, however, is not the only possible merger partner for NS. A link with one of the newly merged Western lines, creating a truly transcontinental railroad, is another possibility. One on a smaller scale would be the acquisition of Florida East Coast Industries, a railroad and real estate company owned by St. Joe Paper Co. of Jacksonville.
Florida East Coast's main line runs 351 miles from Jacksonville south through major cities along Florida's east coast, ending in Miami. NS has three lines running into Florida but none go farther south than Palatka, 50 miles below Jacksonville in the northeastern part of the state.
NS has agreements with Florida East Coast, with which it interconnects in Jacksonville, to carry automobiles and intermodal freight to southern Florida. Florida East Coast, in turn, struck an agreement with NS this year to haul freight over NS lines to Macon, Ga.
When the United States resumes trade with Cuba, it might be to Norfolk Southern's advantage to own the Florida East Coast track; and with Cuban Premier Fidel Castro growing old, the resumption of trade might not be too far off. Even without Cuba in the equation, having its own track into heavily populated southern Florida might appeal to Norfolk Southern's efficiency-conscious executives.
NS also has historical ties with Florida East Coast. Up until about the time of the merger of the Norfolk and Western and Southern railways into Norfolk Southern in 1982, an officer of Southern sat on Florida East Coast's board of directors. Southern also helped Florida East Coast survive a tumultuous strike by rail unions in the 1960s. Southern was interested in acquiring Florida East Coast and Southern Chairman D.W. "Bill" Brosnan made several overtures to former Florida East Coast Chairman Edward Ball, but they never could reach agreement, says Charlie Morgret, a biographer of Brosnan.
The company's merger with NS now would make a lot of sense, said James Schmitt of Westcountry Financial of Somis, Calif., one of the few securities analysts to follow Florida East Coast Industries. Florida East Coast would be much more valuable as part of a long-haul railroad, he said.
Florida East Coast's operating revenues last year were $199.5 million, including $163 million from rail operations. By contrast Norfolk Southern's 1994 operating revenues were $3.9 billion.
The big question is what NS would pay for Florida East Coast, Schmitt said. The smaller railroad, he said, has no debt and a lot of cash, and its stock is underpriced. It was selling for around $68.50 a share last week on the New York Stock Exchange, with about 9 million shares outstanding.
St. Joe Paper owns 54.5 percent of Florida East Coast and considers the company its subsidiary. St. Joe Paper, in turn, is primarily owned by the Alfred I. du Pont trust, for which it provides income. The trust has been successfully pressuring St. Joe to restructure its business. Turning St. Joe into an investment company that buys and sells securities would be the best outcome of the restructuring, Schmitt said.
In the past few months, St. Joe, which also is Florida's largest single landowner, has announced plans to sell its paper, sugar and communication subsidiaries. "St. Joe Paper is in a wind-down mode at this point," said Carl F. Zellers Jr., vice president of Florida East Coast Industries, president of its subsidiary Florida East Coast Railway and a director of St. Joe Industries Inc.. Anything is for sale if the price is right, he said.
The most likely buyer of Florida East Coast would be either NS or CSX Corp., the only two railroads with track running into Florida from outside the state. "There are synergies present for those two companies that would not be present for anyone else," Zellers said.
Working in Norfolk Southern's favor is the fact that CSX already owns track running all over Florida, while Norfolk Southern's only Florida track is in the northern part of the state. NS might find it a lot easier than CSX to get federal regulatory approval for a merger because a merger with Florida East Coast would give CSX a monopoly in the state.
NS and Florida East Coast may sit down and talk from time to time, but there's nothing going on now, Zellers said recently.
No public disclosure has been made of any talks, he said. "Any talks that might have been held," he said, "were held in confidence."
In accordance with company policy, NS had no comment on a possible acquisition of Florida East Coast. "Whether something comes about or doesn't come about depends on availability and price and other terms," NS spokesman Bob Auman said.
LENGTH: Long : 110 lines ILLUSTRATION: GRAPHIC: Map by staff: Major cities along the Florida Eastby CNBCoast Railroad.