Underwriters to Be Picked Thursday for Sale of Conrail
After two years of political jousting, preparations for what promises to be the largest public stock offering in U.S. history will finally kick into high gear late this week when Wall Street learns who has won the contest to manage the forthcoming public sale of Conrail.
On Thursday, the Department of Transportation is expected to tap four to six investment banking firms to manage the underwriting of the government-owned railroad’s sale. The department already has winnowed the list of contestants to 12 from 25 and is hearing a second round of one-hour oral presentations from each of the finalists.
Once the winners are selected, the long, slow process of selling the government’s 85% stake in Consolidated Rail Corp., as Conrail is more formally known, is expected to gather steam quickly. Many on Wall Street predict that Americans will get a chance as early as February or March to invest in the company they helped pull from the wreckage of the Penn Central Railroad in 1976.
“It can’t happen this year,” said a corporate finance director at one of the investment banks still in the running. “But there is going to be a sale, and the sooner the better--March at the latest.”
How many shares will be issued and for what price are questions for the underwriters--each of whom will share equally the $70 million to $90 million in management fees that the sale is expected to generate. But several of the investment bankers who are finalists in the race for the lucrative underwriting assignment predict that the sale will raise as much as $2 billion and that the stock will sell initially for about $15 a share.
Such a huge stock sale would exceed by about $800 million the current U.S. record--the $1.2-billion initial public offering by Henley Group last May. But virtually no one expects the securities markets to have trouble absorbing it.
“I don’t think there is any question whatsoever that the market can handle this,” said William Benedetto, executive vice president and manager of investment banking for Dean Witter Reynolds. “The markets are enormous now and, also, this is going to be coming in what traditionally is IRA season. That is very good timing.”
Wall Street analysts also note that the British stock market was able to absorb the $5-billion public sale of 50% of British Telecommunications two years ago--and the British market is only a fraction of the size of U.S. securities markets.
Some investment bankers have voiced displeasure in recent months over the government’s long delays in approving a sale of Conrail, fearing that the economy and the stock market would deteriorate enough in the interim that such a large public offering would not be feasible. Indeed, the market for initial public offerings has declined sharply in recent months.
But offsetting that negative, analysts said, is the fact that the stocks of railroad companies have rebounded in recent months and have actually outperformed the stock market as a whole over the last 45 days.
Once the winners are named and the stock priced, the bankers then have the difficult task of differentiating Conrail as a long-troubled railroad from Conrail as the new public stock of a profitable company. (After five years of losses, Conrail made a profit in 1981 and has been profitable ever since.)
“Everybody knows Conrail the company, but nobody knows Conrail the stock,” said one railroad analyst whose firm is one of the underwriting finalists. “There’s no history here. It’s new and untried, just like a new automobile.”
The prospect of selling the government’s stake in Conrail to the public was first raised last summer when Norfolk Southern Corp., a railroad company that competes with Conrail on some lines, withdrew its $1.9-million offer to buy it. (The other 15% is owned by Conrail employees. Their shares will be distributed to them after the public offering.)
Since then, dozens of Wall Street firms have been scrambling to win part of the lucrative underwriting business.
As Dean Witter’s Benedetto put it, “The Department of Transportation has done a marvelous job of having us all panting for this thing.”
But at least three of the slots appear to have been locked up long ago. Congress directed the government to select four to six investment bankers to manage the underwriting and specified that those firms that had been advising the Administration, Congress and Conrail itself on the disposal of Conrail should get favored treatment. So Goldman, Sachs & Co., Morgan Stanley and Lazard Freres are considered by many on Wall Street to be shoo-ins for underwriting jobs.
This, too, has sparked controversy on Wall Street because all three cater to institutional investors. Critics argue that it is individual investors who should get first crack at buying Conrail stock because they are the taxpayers who bailed out the railroad with $7.7 billion in taxes.
“This should be an offer for the citizenry,” said Benedetto, whose firm caters heavily to small investors and is in the running for one of the remaining spots--as are such retail brokerage giants as Merrill Lynch and Shearson Lehman Bros.
Other than their clout, investment banks still under consideration say they are not entirely clear what credentials the Department of Transportation is seeking in Conrail underwriters. But several said they have been peppered with questions about their willingness to commit all of their firms’ resources to make the Conrail offering a success.
