Norfolk Southern Corp. dramatically upped the bidding for Conrail Inc., topping CSX's recent offer by nearly $1 billion yesterday and threatening to launch a hostile takeover if necessary.
While the action was not unexpected, the $9.1 billion all-cash offer was surprisingly hefty, one that pits Conrail stockholders against company executives who insist that a marriage between CSX and Conrail is more desirable.
Long considered the most aggressive and well-heeled railroad on the East Coast, Norfolk Southern vowed last week to fight the CSX-Conrail merger that would give those companies control of nearly three-fourths of the freight east of the Mississippi River.
Norfolk Southern's offer would mean $100 per share in cash to Conrail stockholders, beating the CSX offer of a cash-and-stock mix by $11.49 a share.
"This proposal is better on every point than the CSX-Conrail proposal announced last week," said David R. Goode, chairman, president and chief executive officer of Norfolk Southern, which has been pursuing Philadelphia-based Conrail since 1984.
"Unless you terminate your pending proposed deal with CSX, Norfolk Southern would make its offer directly to shareholders," Goode wrote in a letter yesterday to Conrail Chairman David M. LeVan.
News of the higher bid sent Conrail's stock up $10.875 per share to $95.625 yesterday on the New York Stock Exchange. A week ago, before CSX made its offer, Conrail shares traded at $71.
CSX's surprising cash-and-stock offer last week for Conrail was worth $8.4 billion, but its stock price has fallen more than 6 percent since then, pulling down the value of the total bid to about $7.8 billion.
CSX's next move was uncertain, but analysts predicted the battle was far from over.
"I don't think this is over," said Renee Johansen, a railroad analyst for Wheat First Butcher Singer in Richmond, Va. "At the very least, they [CSX] will try to wrestle it out in the courts first. Barring their ability to do that, you could see a second bid. But first, Norfolk Southern has a little battle in the courts."
In fact, Pennsylvania has a law saying the impact of a hostile takeover should be weighed against the interests of employees and the public, as well as stockholders. As part of its takeover strategy, however, Norfolk Southern filed suit in U.S. District Court in Philadelphia yesterday challenging that statute, contending that only the interests of stockholders should be considered. Conrail is based in Philadelphia.
Conrail issued a statement yesterday urging its stockholders to await the response of its board of directors, which it said would review Norfolk Southern's offer "in due course."
Meanwhile, Richmond-based CSX said that Norfolk Southern's hostile offer "doesn't provide the same long-term value as the strategic CSX-Conrail partnership, which offers Conrail shareholders tax-free equity."
A Norfolk Southern-Conrail merger would create one of the country's biggest railroads, matching Norfolk Southern's strength in the Southeast with Conrail's extensive track network in the Northeast and Midwest. It would give Norfolk Southern access to the lucrative New York market for the first time.
The fight ultimately could mean that Conrail might be carved up by CSX and Norfolk Southern, effectively creating two powerful East Coast rail systems.
"When this is all said and done, the bidding process will end up with a division of Conrail with CSX and Norfolk Southern picking up some pieces," predicted James M. Brunkenhoefer, national legislative director for the United Transportation Union, which represents hundreds of rail workers in Maryland.
While Conrail and CSX have extensive tracks through Maryland, Norfolk Southern has limited trackage in the state, running up through the Shenandoah Valley to Hagerstown, along the old Southern railroad route. In Hagerstown, Norfolk Southern operates a fairly large hub, transferring its freight to Conrail for north-south movement.
The announced plans last week to merge CSX-Conrail sparked concerns about job losses in Maryland and loss of rail competition at the port of Baltimore. And Brunkenhoefer predicted that a Conrail-Norfolk Southern merger could also result in the loss of jobs.
CSX employs about 1,900 people in Maryland, while Conrail employs about 300 Marylanders.
A Conrail-Norfolk Southern merger could, however, prove more beneficial for the port of Baltimore. Because Conrail and CSX currently are the only railroads serving the port, a merger by the two would create one railroad and jeopardize competitive rates.
A Conrail-Norfolk Southern merger "would keep two railroads in the port," said Sam Azzarello, general manager of sales for the Maryland Port of Administration, which operates the state's public marine terminals. "Competition is good for anyone, whether it's the port or the newspaper."
"But who knows how all this will play out," he said.
Norfolk Southern is the dominant railroad at the port of Hampton Roads, Va., Baltimore's primary competitor.
