Takeover Talk Sends Conrail Stock Soaring

Shares of Conrail, created in the 1970s as the holding company for several bankrupt Northeastern railroads including Penn Central, closed at a new high for the year Tuesday on speculation that the freight carrier may be a takeover target, analysts said.

Conrail stock closed at $45.125 on the New York Stock Exchange, up 87.5 cents. Its previous 52-week high was $44.375. The stock has risen almost 15% in recent weeks.

Conrail, formally known as Consolidated Rail Corp., declined to comment on its stock activity.

Provident National Bank analyst Andrew Geller tied Conrail’s gain to the potential for a buyout or restructuring after Conrail’s statutory takeover protection ends next April.

The government, which had taken over the struggling railroad companies, sold shares to the public in 1987 at $28 a share.

Stock Restrictions

Since then it has been solidly profitable, earning $142 million or $2.07 a share in this year’s first half on revenue of $1.75 billion. In 1988, the freight railroad, whose market extends from the Northeast to Chicago, earned $306 million or $4.44 per share on revenue of $3.49 billion.

Under the spinoff plan, non-rail buyers are blocked until April 3, 1990, from acquiring more than 10% of Conrail, while other railroads can buy more than 10%, but not vote their shares before then.

Terms of the spinoff also restrict until Oct. 21, 1991, the amount of net income Conrail can use for dividends and stock buybacks. Under the restriction, Conrail currently has $107 million available for such uses, it said.

Drexel Burnham Lambert rail analyst Linda Dunn said she has been recommending Conrail as the most attractive restructuring candidate among rail stocks due to its strong balance sheet and its upcoming loss of takeover protection. She estimated Conrail’s break-up value at $70 a share.

Geller said there was also speculation “Conrail will try to do something to forestall (a takeover) by trying to get its stock price up.” He said it might pursue a large cash dividend or stock buyback.

Although Conrail has recently raised its dividend and may do so again in the future, it is limited in the amount it can distribute to shareholders.

Large Dividend Needed

Geller said Conrail may ask Congress by the end of the year to remove the dividend restriction in order to take steps to boost the price of the stock. Conrail stated previously that it would not seek favors from Washington until it completed a “strategic process” to enhance share value.

Salomon Bros. analyst Michael Lloyd said the dividend restriction made takeover speculation premature.

If an acquirer could not pay itself a large dividend before October, 1991, the purchase would be less attractive, he said. “I can’t believe anybody would be getting excited about it right now,” he added.