THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Thursday, October 24, 1996 TAG: 9610240364
SECTION: FRONT PAGE: A11 EDITION: FINAL
SOURCE: BY CHRISTOPHER DINSMORE, STAFF WRITER
LENGTH: 91 lines
CSX may have dismissed Norfolk Southern's offer for Conrail on Wednesday as a ``non-bid,'' but most observers don't think it will be that easy.
Norfolk Southern Corp. has a very good chance to win the war for Conrail Inc. and its attractive rail connections in the Northeast, rail stock analysts said.
Norfolk Southern's offer is not only bigger than CSX Corp.'s, they said, but it would result in greater competition for rail freight east of the Mississippi River, which makes it attractive for regulators and shippers. ``It's a better offer because it carries less regulatory risk and is less likely to anger shippers,'' said Anthony Hatch, a rail stock analyst with NatWest Securities Corp. in New York.
``Competition is the absolutely essential ingredient of transportation,'' said Robert Banks, chief executive of R.L. Banks & Associates, a Washington-based railroad consultant.
Norfolk Southern is offering owners of Conrail stock $100 a share, compared to CSX's offer of a mix of cash and stock worth about $87.75 a share based on Wednesday's closing stock price.
``This is an offer that you might characterize as an aggressive offer because it's an offer we intend to win,'' said Norfolk Southern Chairman David R. Goode.
Norfolk Southern's principal advantage is that - for now - its offer is at least $1 billion, or $12 per share, higher than CSX's proposal.
CSX thinks otherwise. ``Norfolk Southern's hostile offer comes as no surprise,'' CSX said in a statement. ``It simply does not provide the same long-term value as the strategic CSX-Conrail partnership.''
CSX said that a Norfolk Southern purchase would be delayed by anti-takeover measures in the CSX deal. A delay would erode the value of Norfolk Southern's offer to less than $90 a share, CSX said, because Conrail shareholders wouldn't be able to invest that money immediately.
But the people paid to pick good stock bets disagree. Norfolk Southern has ``come back with a pretty powerful offer here,'' said Charles Vincent, an analyst with PNC Financial Corp.'s institutional investment unit in Philadelphia. ``It's cash up front, and they're trying to get it done quickly.''
Norfolk Southern's bid is backed by cash-on-hand and a $4 billion line of credit with two investment houses, Merrill Lynch and J.P. Morgan.
``It certainly is a strong statement on Norfolk Southern's part,'' said Renee Johansen, an analyst with the Richmond brokerage Wheat First Butcher Singer.
``Either Norfolk Southern or CSX could put together a very good case for their merger,'' Johansen said. ``I think Norfolk Southern could put the better or easier case together.''
Its case is based on the question of competition, particularly in the Northeast, where Conrail has enjoyed a near monopoly in such major markets as New York and Boston.
``Both CSX and Norfolk Southern cannot afford to let the other acquire Conrail in its entirety,'' said Jeff Medford, an analyst with William Blair & Co. in Chicago.
CSX and Conrail would control 70 percent of rail traffic east of the Mississippi River, a dominance Goode called ``egregious.''
``A CSX-Conrail merger is simply unacceptable,'' Goode said. ``At many points in the East, CSX is the only option to Conrail, including Philadelphia, Baltimore, Dayton, Indianapolis and Pittsburgh.''
Norfolk Southern and Conrail don't overlap nearly as much, Goode said. The two combined would control about 60 percent of rail transport in the East.
Norfolk Southern also acknowledged that it is committed to working with public officials and other interested parties to ensure competition in the Northeast, which has long been dominated by Conrail. Goode even mentioned New York, long monopolized by Conrail, which CSX hadn't.
``Norfolk Southern seems more willing to negotiate with CSX than CSX did with Norfolk Southern,'' Hatch said.
Norfolk Southern believes it can demonstrate to the Surface Transportation Board, the federal agency that must approve any rail merger, that its acquisition of Conrail is ``in the best interests of shippers and therefore in the public interest.''
Shipping costs are figured in to the prices consumers pay for anything, and competition helps keep a lid on those costs, the consultant Banks said. ``What this has done has opened up the whole eastern railroad system for competition,'' Banks said.
Lost in the news of its takeover bid for Conrail, Norfolk Southern also announced Wednesday that for the 15th consecutive quarter its earnings increased compared to the same quarter a year earlier.
The railroad made a $202.3 million profit in the three months ended Sept. 30, a 10 percent gain over the $183.9 million it earned a year ago. Revenues increased 2 percent to $1.21 billion from $1.18 billion.
Most analysts agreed Norfolk Southern is playing with a stronger financial hand. ``Norfolk Southern is a superior railroad by all objective standards,'' Banks said. MEMO: [For a related stories, also see page A1.]
KEYWORDS: CSX CONRAIL NORFOLK SOUTHERN MERGER RAILROAD
ANALYSIS by CNB