Upcoming Conrail Sale Features Intrigue of a Corporate Takeover Fight

Two years after the government set out to sell Conrail, disposing of the freight railroad has taken on the intrigue and bloodletting of a nasty corporate takeover fight.

The Transportation Department, which owns 85% of the railroad’s shares, is close to a decision on a purchaser for the rail line that stretches across 15 states as far as Missouri and dominates rail transportation in the Northeast. An announcement is expected soon.

But the decision is likely to set off heated debate in Congress, which must approve the sale, and several hearings are promised.

L. Stanley Crane, Conrail’s chief executive and a staunch opponent of the three buyers being considered by Transportation Secretary Elizabeth Dole, already has set the groundwork for an intense lobbying effort on Capitol Hill.

Fear Loss of Jobs

At the same time, shippers and members of Congress who fear a possible loss of Conrail jobs in their home states also have voiced concern about the prospective buyers, especially the reported front-runner, Norfolk Southern Railroad.

“It’s going to be a real donnybrook,” said one railroad insider who has kept close watch on the saga, which stretches back to late 1982 when Dole first said she was ready to consider offers for Conrail.

Conrail was created by the government in 1976 after the Penn Central Railroad and a number of smaller lines went bankrupt, threatening to leave the Northeast without major rail service.

Crane, 69, and a retired chief executive of the Southern Railway, wants the railroad sold through a public stock offering instead of to a single bidder, assuring retention of the railroad’s management team and its structure.

Crane’s views are expected to carry weight on Capitol Hill, since it was under his leadership that Conrail was turned into a moneymaker, with $800 million in cash reserves and an anticipated 1984 profit of $500 million, after draining $7 billion from the federal Treasury during its first five years.

But Dole repeatedly has rejected the idea of a public stock offering approach and wants to sell the rail line to one of the three remaining bidders, each of whom has offered $1.2 billion in cash and other considerations.

In addition to Norfolk Southern, a major Eastern railroad, the remaining contenders on Dole’s list are Alleghany Corp., a New York-based holding company, and a financing group headed by hotel executive J. Willard Marriott.

Battle of Wills

Increasingly, the sale process has become a battle of wills, occasionally erupting into open warfare, between Dole in Washington and Crane in Philadelphia, where Conrail has its headquarters.

The dueling intensified after Dole announced in September that she had narrowed the potential buyers from 15 to three.

Crane suggested two of the bidders just wanted to make a quick profit and had no interest in railroading. His sharpest criticism was directed at Norfolk Southern, saying a purchase by that railroad would result in layoffs and service cuts.

He sent letters to 19,000 shippers urging them to lobby Congress and Dole against the three bidders and in support of his public offering proposal.

Crane also hired a Washington public relations firm with close ties to the White House to push the public offering proposal, and he personally visited Capitol Hill a number of times to enlist congressional support.

When Dole reminded congressmen and state officials that a quick sale would mean earlier collection of state taxes from Conrail, Crane offered to begin paying the taxes--more than $25 million--immediately even though under government ownership he is not required to do so.

Then, Dole launched her counterattack.

In a sharply written letter to the Conrail board of directors she questioned whether Crane was acting on behalf of the board, the railroad and Conrail employees or just himself, implying the Conrail executive might be looking out for his own job with what she termed “the Crane proposal.”

Eased Into Retirement

The Alleghany and Marriott bidders have said they would retain Crane, but Norfolk Southern has made it clear it would not. Crane once headed the Southern Railways and, according to industry sources, was eased into retirement when it merged with the Norfolk & Western to create the Norfolk Southern.

Conrail’s board of directors agreed to rein in Crane somewhat, but not completely. Recently, he formally submitted to Dole his proposal for a sale through a public offering and the board asked her to give it equal consideration.

Conrail officials deny Crane has any personal motives in his opposition to Dole.

“He perceives this is the right course to be taken in the long term on behalf of the transportation infrastructure, the shippers, the Conrail employees and preservation of competition,” Conrail spokesman Saul Resnick said.

The sale process has involved a number of players in addition to Dole and Crane. Each of the bidders has hired Wall Street consultants and brokerage houses to give their proposals support and, in many cases, shoot down the public offering proposal.

Labor, through a special task force, has been negotiating with each of the bidders to try to get the best deal for Conrail workers and met in mid-January to review each of the bids for a final time.

Solid opposition by the labor groups to the buyer chosen by Dole would mean further trouble for the bidder in Congress.

Dispute Over Worth

There also has been a dispute on the worth of Conrail.

With the railroad holding $800 million in cash reserves, its total assets estimated at nearly $6 billion and its net worth--assets minus debts--estimated at $3.5 billion to $4 billion, some congressmen have questioned whether the $1.2-billion cash offering is reasonable.

“Obviously this disparity . . . offers a tremendous incentive for a purchaser to cash in (at) the earliest opportunity,” suggested Sen. Arlen Specter (R-Pa.), who has held a number of hearings on the sale.

John Riley, head of the Federal Railroad Administration, said such concerns did not take into account the fact that any sale would include restrictions to ensure the railroad was not immediately resold and that the purchase plans also included other considerations, including tax benefits totaling millions of dollars.

There also has been a debate over Conrail’s profit record. Alleghany Corp. argues that after Conrail’s unique advantages stemming from it being a government-owned railroad are taken into account, its profits last year are closer to $188 million than the $500 million on the books.

And Dole says that in setting a price, the government must look at “more than just money.”

“We will choose the bidder which has the financial capacity and the commitment to railroading that will ensure a viable future for Conrail,” she said.

“We want a railroad that shippers can rely on and in which the work force can feel secure. We also want to sell a railroad that will never be a burden to the American taxpayers again.”