Norfolk Southern, Conrail in merger negotiations

August 03, 1994|By Journal of Commerce

Norfolk Southern Corp. and Conrail Inc. are negotiating a merger that would form a 26,400-mile railroad blanketing the Eastern half of the country.

A merger would combine the predominantly north-south Norfolk Southern with the east-west Conrail, resulting in a network stretching from Chicago to Boston and from the Canadian border to the Gulf of Mexico.

In recent years, the port of Baltimore has competed intensely with the Norfolk, Va., port, which is served by Norfolk Southern. Rail service in Baltimore is provided by Conrail and CSX. It was not clear yesterday what impact the merger would have on Baltimore.

"Until we can understand what the synergies and strategies are, we can't evaluate impact on us," said G. Gregory Russell, deputy director of the Maryland Port Administration, the state agency that operates the port's five public terminals.

"We would hope a merger would mean more cost-effective service to Baltimore," he said.

Executive conversations leading to creation of the super-regional railroad have been under way for as long as six months. The talks predate the recently announced combinations of Burlington Northern and Atchison, Topeka & Santa Fe, and of the Illinois Central and Kansas City Southern.

If the talks are successful, Norfolk Southern would acquire Conrail, which controls access to markets the Norfolk-based carrier considers essential to its growth.

Neither railroad would confirm or deny the existence of merger talks.

"I can't comment on it," said Magda Ratajski, Norfolk Southern vice president of public relations.

"Conrail does not comment on such matters," said Robert Libkind, a Conrail spokesman.

The combined company would generate more than $7.1 billion in operating revenue, based on 1993 data. They accounted for 24.6 percent of industry revenue.

The two railroads handled more than 50 percent of coal carloads originated in the East last year. Conrail was first and Norfolk Southern second among Eastern carriers in intermodal traffic, with a combined 24 percent of the industry traffic originated.

A merger would create a strong strategic alliance and is not viewed as a reaction to the earlier proposed mergers.

"Let's face it, everyone is talking to everyone else in the railroad industry right now," said a Norfolk Southern executive, speaking on condition of anonymity.

Norfolk Southern does not have access to the port of New York and New Jersey over its own lines and must use a cumbersome route from Buffalo, N.Y., over tracks of the Delaware & Hudson Railway unit of CP Rail System and the New York, Susquehanna & Western Railway. Conrail has the preferred service routes between Chicago and New York.

A merged Conrail-Norfolk Southern would have access to all the Mississippi River gateways between the East and the West and would extend as far west as Kansas City, Mo.

It would have connections with all of the Western rail systems.

Rather than threatening Western carriers, a Norfolk Southern and Conrail merger would give Western railroads additional routing options to avoid congested or less-efficient routes. Congested Chicago is Conrail's principal Western gateway. Merged, the company could route New York-bound traffic from Kansas City to a Conrail point farther east.

The Norfolk Southern-Conrail talks were not unexpected.

"It doesn't surprise me in the least. I've been hearing rumors," said a senior executive at a Western railroad, speaking on condition of anonymity. "Norfolk Southern is looking for ways to grow. . . . There's a lot of synergy between those two railroads."

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