ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, November 18, 1996 TAG: 9611180143
SECTION: VIRGINIA PAGE: A1 EDITION: METRO
SOURCE: GREG EDWARDS STAFF WRITER
THE TWO RAILROADS are waging a bitter fight for control of Conrail.
A hearing today in federal court in Philadelphia opens a busy week in the battle between two Virginia-based railroads, CSX Corp. and Norfolk Southern Corp., for control of Philadelphia-based Conrail Inc.
Also this week, a House of Representatives committee will hold a hearing on the proposed sale of Conrail, the dominant freight railroad serving Northeastern markets, and Conrail shareholders face deadlines to respond to multibillion-dollar cash offers by both CSX and NS for their stock.
Both Richmond-based CSX and Norfolk Southern, with headquarters in Norfolk, are interested in Conrail for its lucrative rail routes. CSX and Conrail announced a planned merger Oct. 15, and NS countered with its own offer for Conrail on Oct. 24.
Both companies have since raised their bids for Conrail, with CSX's offer of a combination of cash and stock now standing at about $8.4 billion and NS's all-cash offer worth $10.1 billion.
Norfolk Southern asked for today's hearing before U.S. District Judge Donald VanArtsdalen. The company is hoping to convince the court to strike down obstacles in Pennsylvania law and in the CSX-Conrail merger agreement to NS's own hostile bid for Conrail.
Norfolk Southern is seeking an injunction that would halt the closing later this week of CSX's cash tender offer for 19.9 percent of Conrail's shares.
Such an injunction, NS spokesman Bob Fort said, would suspend CSX's and Conrail's ability to implement other parts of their merger agreement, which are aimed at blocking NS's counteroffer.
In its court filing, NS said it and Conrail's shareholders had been led "down the proverbial primrose path" by Conrail's board and management. NS said it had long expressed its interest to Conrail's management about buying Conrail. NS said it had been told Conrail was not for sale but, if it ever was for sale, NS would get a chance to bid.
NS said it had negotiated a merger with Conrail between April and September 1994, culminating Sept. 23 of that year, when NS offered 1.1 NS shares for each share of Conrail. The same day, however, then-Conrail Chairman James Hagen broke off talks, saying Conrail's board had decided to keep the railroad independent, NS told the court.
NS said it continued talking with Conrail management about its interest in buying the company. NS Chairman David Goode phoned Conrail Chairman David LeVan about NS's continued interest as recently as Oct. 4, less than two weeks before CSX and Conrail announced their plans.
NS said it was unaware that CSX had begun negotiating a merger as early as July.
NS has alleged the CSX-Conrail agreement attempts to coerce and mislead Conrail shareholders and uses a variety of improper defensive techniques. Behind the CSX-Conrail agreement, NS said, is a sweetheart deal for Conrail management that will eventually put LeVan in charge of a merged company and substantially increase his pay.
Among the targets of Norfolk Southern's lawsuit are:
* A proposed amendment to Conrail's anti-takeover "poison pill" plan that, if approved by Conrail shareholders, would exempt only CSX from any attempt to buy Conrail.
* A stock option that would flood the market with Conrail shares and make a competing bid for Conrail too expensive for a potential buyer.
* A $300 million break-up penalty if Conrail decided to accept a bid other than CSX's.
* A provision that keeps Conrail from considering a competing offer until next summer.
NS also wants the court to give it a chance to present its offer directly to Conrail's board.
Many observers are skeptical about NS's chances in court, and some say CSX is waiting on the outcome of the court case before deciding whether to respond to NS's latest counteroffer. James Higgins, an analyst for the Wall Street firm Donaldson, Lufkin and Jenrette, and others noted that courts don't like to meddle in corporate affairs.
Depending on the outcome of NS's challenge, Conrail shareholders will be faced with a Wednesday deadline to respond to CSX's $110-per-share cash offer for 19.9 percent of Conrail's stock. The tender offer forms the initial stage of CSX's planned takeover of Conrail.
The deadline to respond to NS's hostile $110-per-share cash offer for all of Conrail's stock is Thursday.
Before those two deadlines, however, the House of Representatives Committee on Transportation and Infrastructure plans a hearing Tuesday on the proposed sale. Congress has an interest in the railroad's future because it was formed by Congress in 1973 from several bankrupt Northeastern railroads.
Chairman Bud Shuster, R-Pa., said the committee would not be trying to decide whether CSX or NS had made the better offer for Conrail, but would be looking at the background of the proposals and how the federal Surface Transportation Board would consider either offer. The board must approve any rail merger.
When he announced the hearing at the end of October, Shuster, whose Pennsylvania district contains Conrail repair shops, said he had great concern about any offer that would break up Conrail. But Shuster said he wasn't taking a position yet on either proposal.
Also Tuesday, railroad union presidents are to meet with officials of Conrail and CSX in Washington to discuss the merger plan, the Journal of Commerce reported last week. Ed Wytkind, director of the AFL-CIO's Transportation Trades Department, said the unions plan to hold meetings with various rail carriers who have an interest in Conrail, but he would not confirm that a meeting would take place Tuesday.
Bloomberg Business News contributed to this report.
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