U.S. Agrees to Sale of Conrail : But Norfolk Southern’s Buy-Out Is Opposed

The Transportation Department agreed Friday to sell its 85% stake in Conrail, the federally owned freight railroad, to Norfolk Southern Corp. for $1.2 billion in cash and other considerations.

Transportation Secretary Elizabeth Hanford Dole called the long-expected buy-out “in the best interest of the railroad, its employees, the shippers who use it and the taxpayers,” who have sunk some $7.5 billion in the Conrail system since the early 1970s.

Opposition Seen

But an army of critics in Congress, which must pass legislation approving the sale, indicated that they would fight the agreement on the grounds it would stifle competition and raise prices for shippers along broad swaths of the merged Norfolk-Conrail system. Major railroad unions seem likely to oppose the sale as well.

And Norfolk’s prime rail competitor in the East, CSX Corp., said in Senate testimony that it “will do all within our power” to block the sale, including waging a court battle.

Some key congressmen, Conrail’s private management and labor leaders support a public sale of Conrail’s federally owned stock instead of a buy-out by Norfolk. But Dole rejected that option, saying it would not guarantee Conrail’s long-term survival.

The Conrail sale, which Dole had eagerly sought for two years, would create a 33,000-mile railroad giant--by far the nation’s largest--with tracks stretching from Kansas City to Jacksonville, Fla., to Boston.

It would end nearly 15 years of federal oversight of the Northeast’s troubled railroads, beginning in 1970, when the huge Penn Central Railroad went bankrupt, and climaxing in 1976, when the government forged Conrail from the wreckage of the Penn Central and several smaller lines.

Norfolk Southern’s Offer

Virginia-based Norfolk Southern--already the operator of an 18,000-mile Eastern rail network--would pay $1.2 billion in cash, surrender $275 million in tax credits and give up the chance to write off $2.1 billion in previous Conrail losses in return for the federal stake in Conrail. Norfolk also has offered to buy the remaining 15% of the railroad, now owned by Conrail employees, for about $375 million.

The sale agreement would allow Norfolk to keep $800 million of a cash hoard--estimated at $900 million--amassed by Conrail since the railroad began turning a profit in 1981. The rest would be returned to the government.

Norfolk would have to keep on hand at least $500 million in reserves before paying dividends on Conrail’s common stock and pledging to maintain Conrail’s headquarters in Philadelphia.

Maintaining Competition

In an effort to maintain competition in areas where two railroads overlap, Norfolk also would be forced to sell some rail lines in New York, Ohio, Indiana and Michigan to smaller railroads. The sales would be required by the Justice Department, which has said that the merger of the two systems otherwise would violate antitrust laws.

Dole contended that the merger actually would increase competition and lower shipping prices in the Midwest and East, because it would allow smaller railroads to expand their lines and generate more business through the purchase of spun-off Conrail track.

But in testimony before the Senate Northeast-Midwest Coalition on Friday, CSX Corp. lawyer Mark G. Aron predicted that the buy-out would prove disastrous for Eastern railroads and cause CSX to abandon thousands of miles of track and lay off thousands of employees.

Small Railroads’ Losses

The small railroads counted as likely buyers of Conrail track, he noted, together reported net losses of $9 million in the first nine months of 1984.

“Does anyone really believe that a Rube Goldberg combination of small carriers . . . would provide a real substitute for the competition once provided by Conrail?” he asked.

Rep. James J. Florio (D-N.J.), whose House subcommittee must approve any sale legislation, echoed those concerns in a written statement. And Sen. Arlen Specter (R-Pa.) called the proposed sale “the biggest giveaway since the Dutch obtained Manhattan Island from the Indians for $24.”

“It’s the worst possible alternative,” he said. “It will be fought in the Congress, in the courts and will probably end up in a stalemate.”