CSX sweetens offer to Conrail New bid gets shrug as another is rejected in escalating fight

November 07, 1996|By Jay Hancock | Jay Hancock,SUN STAFF

The great train race of 1996 continued yesterday, as CSX Corp. sweetened its bid for Conrail Inc., Wall Street yawned and Conrail's board formally rejected an earlier, even higher offer from Norfolk Southern Corp.

Tune in soon for the next installment. Will a Pennsylvania judge force Conrail shareholders to swallow CSX's new, $8.3 billion cash-and-stock offer? Will Conrail's board get sued by shareholders who would rather sell to Norfolk Southern for its $9.1 billion in hard cash?

Will Norfolk Southern try to slam-dunk over judge and CSX alike by raising its hostile bid even higher?

"We probably haven't seen the last shoe drop," said Thom Brown, who follows railroad shares for Rutherford Brown & Catherwood, a Philadelphia investment house.

Norfolk Southern spokesman Bob Fort declined to rule out a higher bid from his company and said it will bypass Conrail's board by buying directly from Conrail shareholders. "We are reviewing all our options -- and I mean all our options," he said. "We're charging ahead."

The Conrail contest started three weeks ago when Richmond, Va.-based CSX offered $92.50 cash for 40 percent of Conrail's stock and CSX shares for the rest, a deal worth $8.4 billion at the time. Norfolk Southern, based in Norfolk, Va., countered with a bid of $100 a share in cash, or $9.1 billion.

Yesterday, CSX raised the cash portion of its package to $110, but the total worth of the deal is now only $8.3 billion because CSX stock has fallen almost 13 percent since Oct. 15. It closed yesterday at $43.125, down 87.5 cents. Norfolk Southern shares closed at $87.125, $1.875.

Conrail's board immediately accepted the new terms. And CSX and Conrail executives defended the pact, saying that it would employ Conrail's assets better in the long term. Norfolk Southern's offer also would require a more-lengthy regulatory process, they said, eroding the deal's value by making Conrail shareholders wait for their money.

"The merger is driven by a compelling logic," John W. Snow, CSX's chairman and chief executive, said in a prepared statement. "Clearly, the combination of CSX and Conrail provides the best overall package of benefits to our constituencies, including customers, the communities we serve and the public at large."

But several Wall Street pros preferred Norfolk Southern's package. CSX's new offer "is not as big as Norfolk's," said Cornelius V. Sewell, a stock analyst with Argus Research in New York. And, he added, "I would assume the bidding would go on."

Said Brown: "The deal hasn't really been sweetened that much. I think the price of the stock suggests what the investment community thinks. It's not overwhelmingly exciting." Conrail's stock rose by $1.375 yesterday to $93.625.

CSX and Norfolk Southern themselves provided another reason yesterday to believe that the bidding might continue. They've stopped talking to each other about dividing Conrail's assets after the deal is done, they announced.

"We were wasting our time," said Norfolk Southern's Fort.

That lessens chances of a negotiated settlement and boosts prospects for a drawn-out war and higher bids, analysts said.

"They're in pretty much of a dogfight, and there's a lot riding on who wins," said Brown. "Acquiring Conrail would mean a lot to both those railroads."

Both Conrail and CSX "have the financial capabilities to come up with a higher bid," said another transportation analyst who spoke on condition of anonymity. "It's just a matter of whether you're willing to pay too much at some point."

But money won't necessarily have the last word.

A Pennsylvania law holds that the impact of a hostile takeover should be weighed against the interests of employees and the public -- not just the shareholders. Norfolk Southern has filed suit in U.S. District Court in Philadelphia challenging that statute, contending that only the interests of stockholders should be considered. Conrail is based in Philadelphia.

At the same time, some analysts think that federal antitrust regulators will take a very close look at a combination of Conrail with either Norfolk Southern or CSX. Just because regulators approved the Union Pacific-Southern Pacific merger doesn't mean they'll go easy on a Conrail deal, one analyst said.

A Conrail marriage to either company would create one of the biggest transportation companies in the world.

Conrail operates 11,000 miles of rail-freight routes in 12 Northeast and Midwest states and in Canada. CSX runs more than 18,000 miles of track in 20 states in the East, Midwest, LTC South and Canada. Norfolk Southern has a 14,400-mile rail system in 20 states in the Southeast and Midwest.

Pub Date: 11/07/96

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