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The Railroad Week in Review 12/07/96
featuring: The Battle for Conrail

Ready reference: homepages for Conrail | CSX | Norfolk Southern

The week was an eventful one for the Conrail merger proceedings. On Monday, lead business editor Henry Holcomb of the Philadelphia Inquirer penned a page one piece citing a number of pros and cons of the possible outcomes. Excerpts:

"Philadelphia could wind up with just one railroad -- and that one railroad might well have strong business reasons for providing better service to rival seaports in New York, Baltimore and Norfolk, Va. A decline in rail service here would, among other things, trigger a decline in the region's seaport-related businesses, which now employ about 40,000 people.

"Everybody better be paying attention,'' said Carl Belke, a former top executive with the old Delaware & Hudson Railroad, now CP's St. Lawrence & Hudson unit. ``This merger is far more significant than the ones [ that left the Western United States with only two major railroads ] . . . .This is the one that will set market controls for the Eastern United States.'' Two decades ago, Congress created Conrail and expanded the old D&H Railroad, now part of CP Rail, to replace six bankrupt railroads and continue vital rail service to the Northeastern United States. Conrail was given a virtual monopoly.

"To get to many ports and customers, the D&H had to rent access to Conrail track, "and that never really worked,'' said Belke, the former D&H executive. This merger debate could well be the last chance to fix those problems and maintain the local seaport's growth opportunity in Canada, he said. Norfolk Southern is working hard to dispel that fear. Its director of strategic planning, Bill Schafer, was in Philadelphia Friday and will be back in coming weeks to develop a strategy for convincing rail users that Norfolk Southern would do more here than CSX would. Until the new rail merger law stressed quality of service over competition, CSX was not a viable candidate for merger with Conrail, industry experts say. Under the old law, the deal could not have gone through because too many of CSX's lines run parallel to Conrail's. " []

Wednesday opened with a USA Today interview with Norfolk Southern Chairman David Goode who said, in part, "We've sent an open letter to all shippers, telling them that region is best served by having two railroads of comparable size and scope competing with each other. Railroads must compete with each other, not just with trucks. Despite the argument that a combined CSX/CR would be able to counter the truckers, rail mergers should never be an excuse to dominate a market. We've promised to improve access to important areas like ports by letting another railroad use our lines if we win Conrail. . . . We will be receptive to competitive enhancement going far beyond anything envisioned by CSX's stonewall advocacy of the status quo, especially in the New York/New Jersey area."

Norfolk also ran a fairly aggressive full page ad in major Conrail employment centers with the headline, "Where Will Conrail Employees Be If Competition Dies?" It goes on to raise questions on a number of points. The graphic is a map of the northeast showing some 60 cities and towns that would go 2:1 (industry talk for losing one of two rail carriers). The ad notes that Conrail's Altoona and Hollidaysburg shop complexes could be at risk because CSX has parallel facilities 70 miles away in Maryland.

The copy goes on to say "Conrail employees want to be part of a winning future. Norfolk Southern has the best employee safety record of any major carrier. The best operating ratio. A world-class infrastructure. A reputation for innovation and industrial development...Norfolk Southern and Conrail can boast overfunded, healthy pension funds, ensuring peace of mind for retirees." (CSX's pension plan shortfall consumes 75% of Conrail's surplus.)

Also on Wednesday Conrail and CSX sued NS (see for a full text) alleging, among other things, that NS has "tortuously interfered" and has no intention of buying CR anyway. To which Norfolk responded, in effect, if you don't think we're serious stop hiding behind laws and poison pills and see how fast we move. (see Thursday was the record date for the December 23 vote. Both sides think they are going to win in the first round, and it has been suggested by some observers that the lawsuit was designed mainly to sway some of the fence-sitters.

In other news, Salomon Brothers has cut its rating for Burlington Northern Santa Fe Corp (NYSE: BNI) to buy from strong buy as it reduced the 1998 earnings estimate to $8 a share from $8.50 saying that BNI stood to lose the most of any major railroad from deregulation of utilities. Moreover, said Salomon, "The merger of Santa Fe into the former Burlington Northern is taking longer than planned, and as such we have had to push out the timing of the merger savings."

Illinois Central (NYSE: IC) slipped from Buy to Hold at Prudential as the railroad announced on Wednesday that it may not meet analysts' fourth quarter earnings estimates, citing lower than expected grain movement.

On Monday Canadian National (NYSE: CNI) began operation at its new $20 MM Chicago Gateway Intermodal Terminal with the arrival of a train from Halifax Nova Scotia after a 1,600-mile journey. CNI's intermodal business has grown more than 22 percent since May 1995 when the railroad opened its $200 million St. Clair Tunnel between Sarnia, ON and Port Huron, Michigan.

Two items in the news for Kansas City Southern Railroad (KCS, a unit of Kansas City Industries, NYSE: KSU). First, plans were announced to acquire the outstanding stock of the Gateway Western Railway Co. (GWRR) a Class II rail carrier with operations between Kansas City and East St. Louis and Springfield, Ill., and haulage rights between Springfield and Chicago. Although no price was given, the GWRR stock will be held in an independent voting trust pending a decision by the Surface Transportation Board allowing KSU to control Gateway Western.

Second, The Mexican government on Thursday approved an 11.07 billion peso bid for Northeast Railway by a group led by Transportacion Maritima Mexicana SA (TMM), making it the winner of the first Mexican railway to be privatized. The Communications and Transport Ministry said the partnership, in which KSU has a minority 49 percent stake, acquired 80 percent of the railway.

This week's Barrons (12/2/96) reports on page 52 that research analyst Morgan Keenan has begun coverage of RailAmerica (Nasdaq: RAIL) with an Aggressive Buy Rating, noting "the company's main focus is the acquisition of shortline railroads." True, true. Had dinner with Vice Chair John Marino not long ago and they certainly have turned up the heat on acquisitions with two more in the last 60 days.

On a final note, I'm dropping stock quotes. I think we should be more interested in the health of the industry than whether a particular stock goes up or down every week. Folks who have invested in the rails can check any number of places for the ups and downs. I think we have more important work to do here.

Disclaimer: I am still under contract to NS to assist in local and shortline issues.

--Roy Blanchard

Ready reference: homepages for Conrail | CSX | Norfolk Southern

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