THE VIRGINIAN-PILOT
Copyright (c) 1997, Landmark Communications, Inc.
DATE: Sunday, January 5, 1997 TAG: 9701040485
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY CHRISTOPHER DINSMORE, STAFF WRITER
LENGTH: 99 lines
It's a little clause with big ramification in Norfolk Southern Corp.'s quest to buy Conrail Inc.
Basically, it prohibits Norfolk Southern from even discussing a merger with Conrail until 1999. This extension was recently added to Philadelphia-based Conrail's merger agreement with CSX Corp.
Norfolk Southern is asking a federal court and federal regulators to throw the provision out. The U.S. District Court in Philadelphia has scheduled a hearing on the matter for Thursday.
If the Norfolk-based railroad cannot get the provision overturned, its 10-week campaign to buy Conrail and break up its merger with Richmond-based CSX could be for naught.
Conrail shareholders could not afford to wait two years for Norfolk Southern's offer and would likely vote Jan. 17 to allow the CSX merger to proceed, analysts said.
CSX and Conrail want to merge and extended the provision to ``lock out'' Norfolk Southern or other suitors from July 1997 until 1999. The extension was added when CSX padded its merger offer by $16 a share on Dec. 18 to $9.1 billion.
Norfolk Southern is offering $10.5 billion to lure Conrail away from CSX, but so far Conrail has spurned its richer offer. Buying Conrail would make either railroad the largest in the East.
``The obvious and only intent of the amended lock-out provision is to preclude even the possibility of (Norfolk Southern's) superior offer from being realized for so long that shareholders will feel they are left with no other effective choice but to accept the CSX merger,'' Norfolk Southern said in a statement.
Norfolk Southern has also appealed to the federal Surface Transportation Board, the nation's railroad regulator.
It's asking the federal board to throw out the provision or, if cannot decide before Jan. 17, to bar Conrail from holding the shareholder vote until it decides. Norfolk Southern says the lock-out constitutes unlawful control of one railroad by another.
The transportation board has given no indication when it might act on Norfolk Southern's request.
Meanwhile, railroad stock analysts wonder if the battle for Conrail hasn't gotten out of hand.
``The whole thing is starting to smell like a fish that has been left out in the sun too long,'' said Charles Vincent, an analyst with PNC Financial Corp. in Philadelphia.
``The only certain winner here will be the Conrail shareholder because they're profiting so much, whoever wins,'' said Carole Neely, an analyst with the New York investment bank Brown Brothers Harriman.
Conrail stock has soared from trading around $70 a share before the takeover fight began to around $100 a share.
CSX's offer of a mix of cash and stock is worth about $101 a share to Conrail shareholders, while Norfolk Southern is bidding $115 cash a share.
``If Norfolk is successful next week in court it will put them a step closer to buying Conrail,'' Neely said. ``However, because Conrail is now being sold at such a tremendous premium, I don't know if Norfolk Southern would indeed be viewed as a loser if they don't have to pay $115 a share for Conrail.''
Whichever railroad doesn't buy Conrail will likely get the right to buy or at least use a substantial amount of Conrail's tracks in the Northeast, where it enjoys a near monopoly, Neely said.
Regardless, Norfolk Southern is sincere in its desire to buy Conrail, Neely added.
Norfolk Southern will argue in court that the two-year lock-out violates the rights of shareholders by not allowing them to pursue other merger options.
``Norfolk's bid is obviously the superior one in terms of price,'' Neely said.
CSX and Conrail may argue that they need to block competing offers two years to allow regulators time to review their merger. CSX officials declined to comment.
Pennsylvania law gives corporate boards wide discretion to set merger terms and use anti-takeover defenses such as the lock-out. In an earlier round of Norfolk Southern's effort to block the merger in federal court, Judge Donald VanArtsdalen upheld the lock-out through July.
VanArtsdalen will hear Thursday's arguments on the extension of the lock-out.
Norfolk Southern will also argue that CSX has already gained control of at least 20 percent of Conrail's stock. That would trigger part of Pennsylvania's anti-takeover law that would require CSX to buy the remaining Conrail stock for the same $110 cash a share it bought 19.9 percent of the stock for in November.
Norfolk Southern is arguing that the stock owned by Conrail's executives and directors should be counted as controlled by CSX since they support the merger.
In an effort to render the argument moot CSX sold 85,000 Conrail shares last week, but Norfolk Southern is arguing the threshold has already been crossed, triggering the shareholders right to get the $110 cash a share.
CSX doesn't want to be forced to pay $110 a share of Conrail. It may not have that much cash. Instead it's offering some of its own stock as partial payment.
``It's obvious that they're really extending themselves to do this,'' merger for $9.1 billion of cash and stock, Neely said. ``If they paid ($9.1 billion) it would take quite a few years to recoup it.'' ILLUSTRATION: Color photo