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The Railroad Week in Review 3/15/97
featuring: The Breakup of Conrail

Ready reference: homepages for Conrail | CSX | Norfolk Southern

Thursday's Journal of Commerce carried an up-beat story on the TMM-KCS deal. According to Kevin Hall's Journal of Commerce story, Merrill Lynch's investment banking guru Bill Susman says the initial woes will be forgotten as the purchase's value becomes evident. Readers will recall Transportacion Maritima Mexicana, Mexico's largest ship line, and Kansas City Southern paid nearly three times the nearest competing bid for Mexico's northeast rail corridor.

Susman knows whereof he speaks. After some initial financing wobbles, Merrill wound up taking the lead. The high price was justified, Susman said, because it "reflected the transaction's value to the winners. It's really truly based on a belief of what this market can be. And if they can boost rail traffic from 13% of U.S.-Mexico overland trade to 20%, the returns will be handsome."

The word in the street is that TMM is already a heavy hitter in Mexico and that strength complements KCS' need to find new routes. The rail line to the Manzanillo Container port is one such. Acapulco is another. Among those lining up behind the deal are auto makers Nissan and GM, plus toy leader Mattel.

The Canadians -- all two of them, railroad-wise -- want to come to New York. I had the good fortune to attend the NY DOT hearnings at the World Trade Center session on Thursday. First to the plate was CN Senior Vice President and CFO Mike Sabia, who challenged the proposed CSX-NS breakup, saying, "We believe the CSX-NS plan falls well short of the balanced competition goal." He elaborated by noting that although Conrail's breakup would indeed create competition between CSX and NS for east-west moves, it doesn't do much north-south. One solution would be CN's "New York Network," a network of lines now owned by Conrail, CN, and RailTex' New England Central.

Second to bat was Paul Gilmore, he of the D&H/St Lawrence & Hudson unit of Canadian Pacific. Said Gilmore, "We need access to New York City and Long Island from Albany along the east side of the Hudson River." Though D&H and CP endorse the NS proposal for reciprocal switching at reasonable charges in North Jersey, he also would like to see the same in Albany, Binghamton, Buffalo and other New York locations.

Bob Kurdock, Vice President of Delaware & Otsego's New York, Susquehanna & Western Railway unit, noted that with CSX and NS getting direct access to the New York area, NYS&W's route will become irrelevant for the two Class 1s. "NYS&W realizes that when the Conrail sale is completed, NYS&W must find a new partner to use its New York access in order for the company to survive. If this is not possible, NYS&W must be acquired as part of the sale transaction." NYS&W carries CSX Intermodal and NS stack train traffic on its line between Buffalo and Binghamton, N.Y., and on to its terminal at Little Ferry, N.J., through trackage rights.

Readers will recall that DOCP has seen an unusual amount of trading activity of late. Paul Reiss and I met for a Coke near his Morristown office last week, and he had this to say: "My guess is that CSX and CR may have separately owned 4.9% or so of DOCP, about the max they can own without filing a Hart Scott Rodino notice and being subject to certain SEC insider regs. They may also face STB inquiries if their combined shares amount to 'control' of DOCP. So now they're selling off their holdings to get the combined company down below 5%." With only 1.6 mm shares outstanding, it doesn't take much to own a large chunk.

So. CP wants in, CN wants in, and NYSW wants an out. Is anybody about to pay to play? An attorney friend in Boston who follows the Canadian roads e-mailed this to me: "I don't think either of these companies will be purchasing American railroad assets. In fact they have recently shed some. I believe they will concentrate on improving their service in Canada - i.e. grain backlog - with recent and pending acquisition of new cars and other improvements, along with rationalization in Eastern Canada."

And New Jersey rail-watcher Paul Reiss agrees, saying, "CP is under political criticism in Western Canada at the moment, and the BC socialists are again calling for its nationalization. The current furor has to do with a 40 day backlog of grain exports, and the resultant black eye to Canada's important foreign exchange balances. Many in BC accuse CP of failing to provide enough reliable motive power, and marshal a proper supply of grain hoppers. A lingering dockworkers job action has resulted in fewer ships being loaded, and serious delays in returning wheat cars to the railways."

Given all the heat generated by the Conrail merger, it seemed a trifle odd that of the three protagonists only Norfolk Southern was present at the WTC gathering. Jim Granum, Norfolk's soft-spoken Public Affairs VP, said simply that the deal to divide Conrail will restore competition in the region and turned the podium over to SVP Jim McClellan for a very specific elaboration of the details to date. Cautioned McClellan, "Operations must be balanced with efficiency." Nofolk's proposed operation of the Southern Tier between NY and Buffalo, for example, will use a connection at Binghamton to interchange with CP and Guilford Transportation Inc. The message was clearly that the line will not be the second-class railroad Conrail had made it. It's an asset to be used, said McClellan.

And now to close with something completely different. From the supplier front, Wabash National is in the news again. Because of minor problems with high-speed (90 mph) operation, Amtrak has temporarily suspended operation of its new RoadRailer mail and express trailers. The RoadRailers are going back to the manufacturer, Wabash National, for modifications. The RoadRailers are a key ingredient in Amtrak's drive for profitability, allowing Amtrak to expand its mail and express service.

This coming week we'll have merger hearings in Harrisburg. Stay tuned.

--Roy Blanchard

Ready reference: homepages for Conrail | CSX | Norfolk Southern

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