The Blanchard Company

Marketing and Management Support
for Feeder Railroads

The Railroad Week in Review 1/18/97
featuring: The Battle for Conrail

Ready reference: homepages for Conrail | CSX | Norfolk Southern

Note: This week's review deals solely with the Conrail merger because there's so much to be learned from it, Also, I want to turn more of the commentary over to those who contribute to our electronic bulletin board, and this will be an ongoing practice.

Now, as to the merger news. Shareholders Friday voted down the CSX/Conrail proposal to opt-out of the 20% limit of the Penna anti-takeover law. Norfolk Southern will now invest $1 billion to buy 9.9% of CR shares at $115 a ticket. Although the CR press release is accurate in saying the STB can't make CR and NS merge or un-merge CR and CSX, it CAN prohibit the merging of the railroads, much as it prohibited the Santa Fe-Southern Pacific rail merger some years ago, even after the companies themselves had merged.

Conrail shares closed at $103.50, unchanged; CSX rose $1.75 to close at $46.75, and Norfolk Southern slipped 12.5 cents to $88. My read is that CSX shareholders are relieved, CR holders are happy to get what they got, and NS owners are waiting for the other shoe to drop. It could get dicey now, and players will have to tread carefully lest we revisit the CNW/Soo Line battle for the Milwaukee. In it, Soo Line won the purchase fight but it became clear as time wore on that CNW was the real winner.

On Saturday The Philadelphia Inquirer said more than 90% of the shares not already owned by CSX ,CR retirees, and ESOPs voted against the plan, with only 1.5 million shares in favor. In this regard, Paul Reiss, a private investor in New Jersey notes, "From my standpoint, it seems CSX is about tapped out, cashwise, and NS doesn't seem to have the confidence it expressed a few weeks ago. If CSX fails to win the election (to obtain the opt out), this could be a long winter, especially if NS decides to really throw dice and buy up to 19.9% on its own, or BNSF or UP decide to buy 10% each, or both situations occur. Shades of Allied-Bendix-Martin Marietta!"

And John Gbur, investor and shortline maven in New England weighs in with, "Personally I don't think the merger will come off and have been saying so since the fall. Conrail will be split up [as] it is worth more in pieces then as a whole. The (b)illion dollar question is who will get what pieces. This looks like an exercise I was involved in when I worked for the Penn Central marketing department in 1973. a big map on the wall with VP's coloring in lines for the pieces the other class Is would get." To which former railroad exec Garry Collins adds, "At USRA we drew the map on a cocktail napkin in the lounge."

(None of this is surprising. There are those involved with the present situation who have hauled out their copies of the 20-year old Final System Plan (FSP) which created CR in the first place to see what parts of the FSP might be resurrected. Twice in the last two days I have been involved in line-drawing exercises, both in reference to the FSP.)

Long time contributor Arnold Komisar of NYC writes, "Its starting to get real ugly. It's posturing, confrontational and I wonder if all this is in the shareholders' benefit. What will be left, and what will the morale be of the remaining company. Yes, you can take Conrail apart and hope you can integrate the pieces. You won't save jobs, that's for sure. You won't expand rail traffic to new areas. You will pay the lawyers well, and the consultants, and the politicians. Conrail management will leave with good severance packages, etc. I am glad I sold my Eastern positions at a profit. Because when the arbs are through, the average shareholder of whatever the new "entity" is called will be watching a long, slow ascent for many years until value returns.

Further, writes Komisar, "I doubt Norfolk had any intention of bidding $10.5 billion for Conrail. The arbs and others on Wall street forced up the price and Norfolk had no choice but to continue the bidding. Way back when Conrail was at $84 and $85 a friend of mine suggested that eventually it would go for over $110. Was this because it was that valuable? Or was it because that was what was felt to be the final price when the stock became an object of play? Now I'm not accusing anyone of anything. Let the average investor...decide. But it's now one "humdinger" of a situation. Whoever wins ( and it's not going to be Conrail or its employees as they will soon be history) will have paid a lot for something nowhere near that value. Anyone want to buy the Delaware and Hudson?"

Paul Reiss came back with, "There are three decision making entities, and three victims, as I see the problem now. NS wants to block CSX from a competitive advantage, while gaining critical routes for NS. Buying all of CR isn't NS's #1 goal. Getting several key lines and protecting their balance sheet is the real objective.

Dave LeVan wants to protect his future. NS has made it clear he doesn't have one if they take over. If the merger is blocked, it is unlikely Rob Krebs or Dick Davidson will be any more accommodating when they make their moves. CSX will be lunch meat for somebody if they can't do this deal and NS does, or if CSX pays too much and NS gets its desired routes. Jack Snow knows this.

"CR's shippers, employees, and some shareholders are pawns. The price and open interest of CR puts has moved up, which suggests some hedging of price against the possibility that 103-104 won't hold up. I wouldn't underestimate the role of the Pennsylvania shippers in influencing the outcome before the STB, since the Pennsylvania Power & Light decision clearly broke new legal ground on rate setting for captive shippers. I have to believe NS and CSX are both looking again at how much flexibility they'll have in setting rates post merger, and STB can't enforce conditions which will be overturned in light of PP&L case law."

Finally, about 4 PM on Friday I got a wire from Conrail which quoted David LeVan at length regarding the results of the voting. His remarks were instructive, to say the least, concluding, "The Conrail Board is resolute -- Norfolk's actions will have no effect on our commitment to our merger with CSX. There can be no transaction with Norfolk until 1999 at the earliest. The Conrail Board has determined that a sale to Norfolk is not in the best interests of Conrail."

It surely seems to me that $115 now for all CR shares is more than $110 now for some CR shares and something later linked to the street price of CSX for the rest, even when you add the $16 preferred kicker.

And I'm not alone. The out-spoken Mario Gabelli holds forth in the Annual Barron's Roundtable published today (actually held 1/6), with his "Hall of Shame" for boards that "try to disengage shareholders from the value of their enterprises." In each of three examples (none of them CR) boards attempted to sell the companies for less than they could get. At the end of the Roundtable discussion, panelist and mutual fund pro Michael Price asks, "Can I add a name to the Hall of Shame? Conrail's board." To which Gabelli responds, "I'll second that."

The Blanchard Company continues to advise Norfolk Southern on certain aspects of its bid for Conrail.

--Roy Blanchard

Ready reference: homepages for Conrail | CSX | Norfolk Southern

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