Hearing today on Conrail vote Norfolk Southern seeks to block delay of shareholders meeting

December 17, 1996|By Suzanne Wooton | Suzanne Wooton,SUN STAFF Bloomberg Business News contributed to this article.

A federal court hearing is scheduled today in Philadelphia on a request by Norfolk Southern Corp. to block postponement of a crucial Conrail shareholders meeting that could determine whether CSX Corp.'s takeover of Conrail moves forward.

Shareholders are scheduled to vote Monday on whether Conrail should opt out of a Pennsylvania law. A "yes" vote would allow CSX to complete the next phase of its stock purchase in its $8.5 billion takeover of Conrail, making it the indisputable rail power on the East Coast.

The vote is expected to be extremely close -- so close that Conrail, which is based in Philadelphia, has said it will delay the meeting unless it has enough votes to support the so-called "opt-out" provision.

But Norfolk Southern Corp., in seeking to force Conrail to hold the Monday vote as scheduled, apparently believes that enough Conrail stockholders will rebel against the deal struck by Conrail and CSX and hold out for a bigger, if less certain, payoff by Norfolk Southern.

"Our reason [for filing the motion] is we think they [Conrail] should not be allowed to play fast and loose with shareholders and indefinitely delay the meeting," said Hank Wolf, chief financial officer for Norfolk Southern.

In a front-loaded, two-part offer, CSX wants to pay $110 a share for 40 percent of Conrail's stock and swap CSX stock worth about $85 a share for the rest, producing a blended offer of about $95 a share.

Norfolk Southern is offering $110 in cash for all shares.

But CSX, which already has acquired 19.9 percent of Conrail's stock, is precluded from buying the additional 20.1 percent for the cash part of the deal unless Conrail shareholders "opt out" of the so-called fair value law.

The vote on the opt-out provision requires only a majority of those casting proxies, not a majority of all shareholders.

Announced in mid-October, the deal between Conrail and CSX is one of the most closely watched takeover attempts of the year. It would result in a single-line rail system covering a 29,000 mile-network over 22 states. Both CSX and Conrail insist that it would be a merger of equals, a perfect fit that would produce far greater long-term benefits than would a takeover of Conrail by Norfolk Southern.

After losing an important court battle in Philadelphia last month, Norfolk Southern has waged an aggressive proxy fight, flooding Conrail stockholders with letters and gold cards to vote against the so-called "opt-out" provision.

Conrail stockholders, in effect, are being asked by Norfolk Southern to reject a deal -- at a premium price amounting to nearly 20 times Conrail's 1996 earnings -- in exchange for a better, yet less certain, offer from Norfolk Southern.

"I think people would generally agree that a hefty price is being offered for this franchise," said one analyst for a large institutional investor. "But it's difficult to do a hostile against Conrail. People are trying to figure out whether half aloaf is better than none. It's a cat and mouse game right now."

In addition to producing the proxy fight, the quest for Conrail also has brought forth a barrage of public relations maneuvers, including full-page newspaper ads by both railroads.

But the merger agreement between CSX and Conrail, announced in mid-October, is shrouded in lock-up agreements that make the deal "bulletproof," according to CSX Chairman John W. Snow. Many Conrail shareholders are reportedly miffed that Conrail's board of directors has denied them the chance to vote on a higher offer by rival Norfolk Southern.

"If I were an institutional holder, I certainly would be voting against it," said Thom Brown, a transportation analyst with the Philadelphia-based investment firm Rutherford Brown and Catherwood. "I would want to get top dollar and I think NS is the better offer."

"Our inclination would be to vote against the opt-out under these terms," said the institutional investor analyst. "The differential is significantly large."

A majority of the outstanding shares of Conrail's common stock are held by institutional investors, such as mutual fund companies, banks, insurance companies, and pension plans. Typically, those institutions will not comment publicly on upcoming proxy votes.

But last week, a report by Institutional Shareholder Services, a Bethesda-based consultant to Conrail's largest institutional holders, urged shareholders to vote against the "opt out" provision.

"CSX's front-end loaded, two-tiered takeover does not treat all Conrail shareholders fairly and the lockups contained in the agreement have denied Conrail shareholders the possibility of accepting a higher payment for their shares," said Peter Gleason, a senior analyst at ISS.

While few Conrail shareholders want the lucrative CSX offer to disappear, they might vote "no", hoping to push CSX to increase its bid or to force Conrail's board to ultimately allow stockholders to vote on Norfolk Southern's $110-a-share, all-cash offer.

"Many institutions are merely trying to maximize the return for their shareholders and if that can be achieved by using leverage in the opt-out vote, then that's a reasonable tactic," the analyst said.

But an CSX official said the Richmond, Va.-based company has made no decision about raising its bid.

"People who vote against the 'opt out' are voting against their own self interest to generate value from their stock holdings," said Thomas E. Hoppin, vice president of communications. "If they vote 'no,' it doesn't breathe any life into NS' phantom offer."

Some observers say CSX could take a wait-and-see stance because its agreement with Conrail precludes Conrail from entering a deal with any other railroad until at least mid-1997.

In the meantime, a proxy vote could be rescheduled -- and postponed -- as often as Conrail likes.

Analysts expect between 80 and 90 percent of shares will be voted, so CSX could win with 40 percent to 45 percent of the vote.

Pub Date: 12/17/96

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