Norfolk Southern will consider withdrawing its offer to buy Conrail if Congress doesn't approve the sale of the government-owned freight railroad this year, the company's chairman said Thursday.
Testifying before a House Energy and Commerce subcommittee, Robert Claytor, chairman and chief executive, said Norfolk Southern could not afford to tie up its resources indefinitely while Congress evaluated its $1.2-billion bid for Conrail.
"We have said we have until the end of the year to get this through or we will consider going elsewhere," Claytor said. "When we are devoting 75% to 80% of management time to a transaction, we can only do it for so long."
Claytor's remarks followed a statement by Rep. James Florio (D-N.J.), who said Congress should not be expected to approve the sale until all loose ends are resolved.
Those loose ends, he said, include Justice Department approval of agreements by Norfolk Southern to divest certain railroad lines and the reaching of an agreement with Conrail labor over compensation for employee stock holdings.
Of negotiations with Conrail employees, Claytor said: "We cannot agree with labor, and labor cannot agree with us."
During the hearing, Norfolk Southern announced that it had concluded an agreement providing for the transfer of certain lines to Guilford Transportation Industries of New Haven, Conn.
Norfolk Southern said it would sell 1,300 freight cars and 955 miles of track to Guilford, and provide track rights over an additional 375 miles, for $53 million.
The agreement is subject to Justice Department approval and was made to satisfy government conditions concerning the Conrail sale.
Besides Norfolk Southern, a group of investors headed by the New York firm Morgan Stanley & Co. has also made a bid to purchase the government's 85% interest in Conrail.
Claytor challenged Morgan Stanley's assertion that the investor group's bid would mean an additional $600 million in tax revenue for the government, when compared to Norfolk Southern's offer.
That claim is based in part on speculation about the rate that Norfolk Southern would make use of Conrail depreciation deductions, Claytor said. Based on estimates, "at most, the present value of any reduction in Norfolk Southern taxes attributable to Conrail depreciation will not even approach $100 million," he said.
A Conrail-Norfolk Southern merger would mean a net loss of a maximum of 1,200 jobs, Claytor said.
But Hays Watkins, chairman of competitor CSX Corp., said that combining the railroads would create a "mega-carrier that destroys the present competitive balance."
The Congressional Budget Office reported Thursday that the government would reap a net profit of $200 million if Congress accepts Norfolk Southern's offer.
The CBO said the government would receive $1.4 billion in the deal, including $200 million in excess Conrail cash. Norfolk Southern agreed to hand over any cash held by Conrail exceeding $800 million. The CBO estimates that those reserves would be $1 billion at the end of this year.
But the CBO said the government would lose $400 million in tax revenue over the period 1986-90, primarily because Norfolk Southern would be able to use Conrail tax credits to shield some of its income. Between 1988-90, the government also would lose $800 million in future interest and dividend payments from Conrail. The lost tax revenue and lost profits from Conrail--a total of $1.2 billion--means the government would net $200 million.
Conrail was created during the 1970s from the bankrupt shell of Penn Central and other failing railroads.