ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Thursday, November 21, 1996 TAG: 9611210054
SECTION: VIRGINIA PAGE: A-1 EDITION: METRO
DATELINE: PHILADELPHIA
SOURCE: Associated Press
Despite another legal setback, Norfolk Southern's bid to break up CSX's purchase of Conrail and take over the Northeast freight railroad will likely rest in the hands of Conrail shareowners.
A court ruling that derailed Norfolk Southern's effort to postpone the CSX-Conrail merger represents a significant but not fatal blow to the hostile bidder. An appeals court Wednesday refused to block CSX from proceeding with the first part of its offer.
``The battle is not over yet,'' said Eric Orts, a business professor at the University of Pennsylvania's Wharton School.
At issue is the relative value of a bid by Norfolk Southern Corp. that is worth $10 billion in cash, $1.2 billion more than the cash-and-stock deal CSX has proposed.
Norfolk Southern argues shareholders will lose out if Conrail's board accepts the lower offer. Conrail and CSX say there's more to a merger than simple price: Pennsylvania law allows the target company's board to consider other factors, such as impact on the community, employees and the company's future.
Norfolk Southern was disappointed but not surprised by the appeals court decision not to grant an emergency order, company spokesman Bob Fort said. Litigation was only one part of Norfolk Southern's strategy in its effort to take over Conrail, he said.
Now, he said, NS will turn its attention to winning the battle at Conrail's December shareholders meeting. Over the next several days, Fort said, NS will be do everything it can to reach all of Conrail's constituencies - its shareholders, employees, shippers and others.
NS will continue its newspaper advertising aimed at Conrail shareholders and will make its case in meetings with shippers groups and with officials on different levels of government, he said.
The deadline for Conrail shareholders to accept Norfolk Southern's offer is midnight Friday. The deadline was originally tonight at midnight but was extended a day when NS increased its offer to $110 a share.
CSX and Conrail, in a joint statement, said they were pleased with the ruling.
``Despite Norfolk Southern's continuing attempts to derail the merger of Conrail and CSX, we are committed to each other and to the great future of our combined companies,'' the statement said.
The 3rd U.S. Circuit Court of Appeals decision to let the deal go forward for now allows CSX only to proceed with the first part of its complex offer and buy up to 20 percent of Conrail's shares. CSX will need the approval of Conrail shareholders at a December meeting to buy more, according to Conrail's charter under state law.
That's where the battle will likely be won or lost.
Orts, like other analysts, believes the vote is too close to call. ``Shareholders are now faced with a tough choice,'' he said.
The appeals court decision gave CSX the right to purchase 17.9 million Conrail shares, or 19.9 percent of the railroad, when its tender offer expired at 11:59 p.m. Wednesday. CSX has offered $110 a share in cash for 40 percent of Conrail's stock. For the other 60 percent, CSX has offered shares in the new company now worth about $87 each.
CSX would buy the first 17.9 million shares as part of the cash portion of the bid, altogether worth $8.8 billion. Norfolk Southern's competing bid is $110 a share in cash for all of Conrail's shares.
CSX has hinted it will sweeten its deal to sway investors - most likely the stock portion of the offer, which is now lagging Norfolk Southern's bid. In testimony Tuesday, Conrail board member Bradley Jones said the railroads were discussing a higher price.
``I don't expect that you're going to see a bidding war,'' said Charles Vincent, a rail analyst with PNC Institutional Investment.
Norfolk Southern will go into the special shareholder meeting in December weaker for the court's refusal to block the CSX Corp.-Conrail deal - so long as the decision stands.
The appeals court said it will rule later on whether to uphold the district court decision, which came down against Norfolk Southern's lawsuit to block the CSX-Conrail deal. It ruled Wednesday only to reject an emergency motion to block the CSX tender offer.
Thus, when the December meeting is held, CSX could control nearly 20 percent of Conrail's stock and be able to vote those shares in favor of its deal. With the employee stock option plan and Conrail management's stake, it has about 30 percent.
To win the vote, Conrail is lobbying large institutional shareholders, arguing that CSX is a better fit from a business standpoint. Norfolk Southern will no doubt argue that its offer is better for those same shareholders, particularly since it's worth more.
The outcome, analysts believe, will depend on whether CSX sweetens its deal, as expected, and whether investors believe Norfolk Southern has a chance of winning.
Analysts say Norfolk Southern's best option may be to raise antitrust issues with federal regulators who will have to approve the deal if CSX wins in court and at the December shareholders meeting. ``If you get enough shippers and truckers on your side, you could make it difficult for Conrail to get full approval,'' Vincent said.
Staff writer Greg Edwards contributed information to this story.
LENGTH: Medium: 98 linesby CNB