THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Sundday, October 27, 1996 TAG: 9610260465
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY CHRISTOPHER DINSMORE, STAFF WRITER
LENGTH: 143 lines
A dramatic business prizefight will unfold in the coming months as two big Virginia-based railroads duke it out for the title of biggest railroad in the East.
The first round opened two weeks ago when Richmond-based CSX announced plans to merge with the northeastern rail network Conrail, a union that would create the nation's third-largest railroad.
Wednesday, a surprised Norfolk Southern struck back, topping CSX's friendly $8 billion offer by more than $1 billion.
In coming months, the battle will play out everywhere from railroad-town corners to Capitol Hill as everyone from shippers to the federal government join the debate.
At stake is who's going to be the dominant railroad east of the Mississippi River. Either merger would create a rail network blanketing the East, from New England to New Orleans, from Florida to Chicago.
The CSX-Conrail merger would control 70 percent of rail freight in the East if they merge.The Norfolk Southern-Conrail union would control 60 percent.
``If either one gets the railroad, it's going to put the other at a competitive disadvantage,'' said Jeff Medford, an analyst at Chicago's William Blair & Co. ``Both companies are in a position where they cannot be willing to lose.''
If Norfolk Southern loses its bid and fails to win extensive rights to use Conrail lines in the Northeast, it will find itself trying to compete with a railroad whose reach far exceeds its own.
Such a loss would, however, mean that Norfolk Southern's headquarters would remain in Hampton Roads. In an offer that put fear in the hearts of local leaders, Norfolk Southern offered to ``consider'' moving its headquarters to Philadelphia if Conrail agrees to merge with it.
But keeping the headquarters may be a short-lived victory for Hampton Roads. If CSX wins Conrail, Norfolk Southern might feel compelled to seek a merger with one of the two giant western railroads, which could also mean a move.
Norfolk Southern's bid has some serious hurdles to overcome, including a Pennsylvania anti-takeover law and several break-up prevention measures in the CSX-Conrail agreement.
Norfolk Southern, based in Norfolk, has sued Conrail to force it to consider the richer offer and block the anti-takeover measures.
``We're in this to win,'' Norfolk Southern Chairman David R. Goode said Wednesday. ``We believe this is a very compelling transaction. This is a combination that would increase, not diminish competition.''
Going in Norfolk Southern's favor is the size of its bid, its financial strength relative to CSX and concerns about competition.
``We are very serious about wanting to ensure that competition in the rail industry is maintained and thrives,'' Frank Kruesi, the U.S. Transportation Department's assistant secretary of policy, said in an interview with the industry newspaper Journal of Commerce. ``We have been concerned for some time about the amazing implosion of the railroad industry.''
In two years the industry has gone from nine major carriers to five. Either proposed merger with Conrail would reduce the number of major carriers to four.
Shippers also worry about a loss of competition from any rail merger.
The National Industrial Transportation League, which lobbies in Washington for 1,200 large shippers, is in a ``wait-and-see'' mode on any Conrail merger, said Robert Voltmann, its director of policy.
One huge shipper, Ford Motor Co., is reviewing the impact of the proposed mergers, said spokeswoman Cheryl Eberwein. Ford just signed a 12-year pact with Norfolk Southern to handle distribution of all its vehicles, but will continue to use both CSX and Conrail to some extent.
``Our logistics people said it's not necessarily all bad,'' she said. ``It could be pro-competitive in some areas of the country.''
Both Norfolk Southern and CSX argue that their proposed mergers with Conrail would enhance competition.
``Conrail and CSX already face fierce competition from many sources, including trucks and other railroads,'' CSX said in a statement. ``Competition will be greatly enhanced by combining the best of Conrail and CSX routes. . . are willing to agree to provide competitive access to a second railroad.''
CSX and Conrail clearly saw no reason to allow another railroad into points where Conrail has a dominant position, such as Boston and the huge New York market.
``CSX and Conrail would constitute a very dominant market position,'' Goode said. ``A Norfolk Southern-Conrail combination . . . would be more balanced, make it much easier to provide true competitive rail service for shippers and serve the public interest.''
Both Norfolk Southern and CSX have indicated a willingness to negotiate access with the other, but the question is who's going to control those talks by winning Conrail.
``Both want to be in a position to control their own destinies, to be dealing the cards,'' Medford said.
Going farther than CSX, Norfolk Southern has said it would even be willing to grant access to markets dominated by Conrail. Goode specifically mentioned New York.
``Most railroads have some areas they serve as a monopoly, even Norfolk Southern,'' Voltmann said. ``Conrail is not unique in that. What may require a different approach is Conrail is not a creation of free enterprise, but a creation of the federal government.''
Congress created Conrail in 1973 as a government-owned business from the remains of six bankrupt railroads to head off a transportation crisis.
In 1986 the federal government sold Conrail in a public stock offering after Congress rejected a proposed buyout by Norfolk Southern in part because of the lobbying of CSX. CSX feared Norfolk Southern would gain an unbeatable advantage in the East with access to Conrail-dominated markets.
A powerful Pennsylvania congressman has scheduled a series of hearings starting Nov. 19 to look at the question of what a purchase of Conrail might mean to rail service and employment.
``We must be certain that on balance this merger will enhance competition, improve transportation services and protect the rights of employees,'' Rep. Bud Shuster said in a statement.
Shuster, a Republican, is chair of the House Transportation and Infrastructure Committee and represents a district that includes Altoona, where Conrail has some large locomotive and car-repair shops.
Shuster said Congress needs to review and change where necessary the legislation that created Conrail.
Most analysts believe Norfolk Southern may be able to make the stronger case on competition.
Norfolk Southern is ``not as large a railroad as CSX,'' said Renee Johansen, an analyst with the Richmond brokerage Wheat First Butcher Singer.
Charles Vincent, an analyst for PNC Financial Corp. in Philadelphia, agreed. ``They don't compete as directly against Conrail as does CSX,'' he said.
In the short term, Conrail's board must decide what to do about Norfolk Southern's offer, the federal court in Philadelphia must review Norfolk Southern's lawsuit and Conrail shareholders must decide which offer to respond to.
Ultimately though, unless Congress gets more deeply involved, how railroad competition in the East shakes out will be determined by the Surface Transportation Board, the federal agency that succeeded the Interstate Commerce Commission and will have to approve the merger.
The Transportation Department is ``concerned that the direction we are going in is horrifically anti-competitive and will be hard to unravel,'' Kruesi said. ``We need to be sure we get things right.'' ILLUSTRATION: Graphic/The Virginian-Pilot
The Players
Norfolk Southern, Conrail Inc., CSX Corp.
Current Discriptions
After a Merger
Merged Territories
[shows tracks of each railroad]
[For complete copy, see microfilm]
KEYWORDS: NORFOLK SOUTHERN CONRAIL CSX RAILROAD TAKEOVER
MERGER PROFILE by CNB