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The Railroad Week in Review 12/14/96
featuring: The Conrail-CSX Merger

Ready reference: homepages for Conrail | CSX | Norfolk Southern

The week began with a letter from NS Chairman David Goode to the Conrail Board offering to formalize in a written agreement with Conrail, on behalf of Conrail's shareholders, Norfolk Southern's earlier pledge that it will not be a party to any agreement with CSX or Conrail that delivers anything less to Conrail shareholders than a $110 all-cash, all-shares offer--with prompt payment through use of a voting trust--so long as Conrail shareholders reject the maneuvering by CSX and Conrail's management to pay shareholders less than they deserve for their shares. Norfolk Southern also announced that it has extended its previously announced $110 all cash, all shares tender offer through 12:00 midnight Jan 10, New York City time.

Not to be outdone, CR/CSX called the NS offer a "non-event," and maintained that Norfolk Southern was misrepresenting its ability to close its tender offer. A press release said, "Norfolk Southern could not close its hostile tender offer on its previous expiration date of December 16, 1996, nor can it close on its revised expiration date of January 10, 1997, or at any time thereafter until well into the summer of 1997 at the earliest..."

Tuesday brought a CSX/Conrail announcement that they have jointly begun an effort that will "bring even more competitive benefits to customers who will be served by their merged railroad" so that so-called two-to-one customers -- customers who are today served by only CSX and Conrail -- "will fully participate in the benefits of this pro-competitive merger." They won't tell any more, however, because "The negotiations are confidential business discussions, and the companies will not comment on them until agreements have been reached."

Maryland-based Institutional Shareholder Services (ISS), which provides corporate analyses to institutional clients, suggested that shareholders defeat a proposal the CSX/CR opt-out proposal, saying "CSX's front-end loaded, two-tiered takeover does not treat all Conrail shareholders fairly, and the lock-ups provided in the agreement have denied Conrail shareholders the possibility of accepting a higher payment for their shares. The only thing prohibiting the higher offer from being presented to shareholders are the barriers erected by Conrail to ensure the company merges with CSX." CR and CSX declined to comment on the report.

There seem to be some pockets of resistance forming. A Conrail shareholder group seeking to block the railroad's proposed merger with CSX has asked a federal court to declare that CSX must pay $110 per share cash on demand for all Conrail shares. The group said the combined stake of Conrail shares held by CSX and board members of Conrail exceeded the 20 percent threshold which, under a Pennsylvania law, triggers an obligation by an acquiring firm to pay "fair value" for all remaining shares of the firm.

Fridays' WSJ reported that The NY/NJ Port Authority will ask federal regulators to break up CR's rail monopoly at the port as a condition for approving any sale of CR. Critics say the CR lock on the port reduces its competitiveness. Which is about right. Norfolk, Charleston, Savannah, Jacksonville, Fort Lauderdale/Miami, and New Orleans are all growing while NY and Phila are stagnating. One can argue very convincingly the growth elsewhere is in part driven by the presence of two healthy RRs, NS and CSX.

Norfolk Southern placed two more full-page newspaper ads this week. The WSJ ad reads, "To Conrail Shareholders: Give Conrail a vote they can't ignore AGAINST[in bold letters 3" high] the proposal to opt out of the Penna "Fair Value" law and the proposal to adjourn 12/23 if they don't have the votes to opt out. The Philadelphia Inquirer ad is "To Participants in Conrail's ESOP." The message was several-fold. First, you can vote NO to the opt out without your employer finding out. Second, NS has six reasons why you'll be better off with NS than CSX, from less property overlap to the pension issue to keeping a significant operating presence in Philadelphia. (I'm hopeful the full copy will be available on the NS website later,

And to close the week Norfolk said Friday that Conrail and CSX are allowing shareholders no choice on December 23, effectively denying them the right to vote against the proposed amendment to Conrail's charter. "Permitting defendants to disenfranchise those shareholders who refuse to opt out of the statute designed to protect them against coercive, two-tiered front-end loaded tender offers like the CSX transaction defeats the purpose and intent" of the Pennsylvania law and "contravenes the public policy concern for credible corporate democracy," Norfolk Southern said in its motion.

The Kansas City Southern venture into Mexico has generated a fair amount of comment. Regular readers know KCS paid a LOT of money for the train ride. A reader in NYC writes, "There's a very insightful piece on the merger in the Journal of Commerce. It seems TMN is becoming the largest transportation company in Mexico. This new privatization will have implications for shipping as well. According to this article it may affect American President Lines relationships with Union Pacific. I don't really know if KCS overpaid or UP just didn't want to be a player at any price. Union Pacific may be saving its credit for larger fish in the east and consolidating its recent mergers."

A Chicago regular notes, "KSU may have purchased Mex Rail (and Gateway Western) simply for their own survival...and that can justify an awful high price tag. While KSU has been a fine railroad, their O.R. has been slip-slidin' away for some time, and they made no friends, and Mike Haverty spent a great deal of the Company's good-will capital, fighting the UP/SP merger. It may be these factors more than anything else that caused KSU to substantially out-bid the competition for this property."

Canadian Pacific seems to be wondering whether setting up the St. Lawrence & Hudson regional railroad subsidiary (SLH) is paying off. In a speech Tuesday CP President Rob Ritchie said they are considering options for CP's vast eastern Canadian rail network, including its partial or complete sale, or merger with another railway. The SLH unit is still struggling to make a profit, break-even performance is not good enough to survive, and, "As the owner, the CPR must consider all of its options for obtaining shareholder value for our eastern assets."

I'm in Arizona next week to speak at the BNSF shortline meeting, attend a college graduation ceremony, and visit my good friend Jake Jacobson on the Copper Basin Railroad. The Week in Review will continue unabated and for better or worse, however.

--Roy Blanchard

Ready reference: homepages for Conrail | CSX | Norfolk Southern

Week in Review

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