Ghost of B&O; Wends Through Litigation
The obituary for the Baltimore & Ohio Railroad was written in 1963 and again in 1986, but at least from a financial perspective, it may be years before the railroad cashes out.
The belated demise is a result of a determined battle between a small group of investors holding B&O; securities and the giant CSX Corp., which swallowed up the rest 26 years ago. At the time, several loose ends were left unattended.
About 95% of the B&O;’s equity was digested relatively easily, but some outstanding shares and an extremely long-term bond that, at the discretion of holders, could be redeemed in common stock, remained on the market.
The bond is of particular interest because, while hardly unique, it had its quirks. On the ordinary side was a coupon, carrying a 4 1/2 yield; and a conversion factor: 10 B&O; shares for each $1,000 in face value. Unusual, at least for anything other than a railroad bond, was the long maturity. It was issued in 1956 with redemption in 2010.
Initially, there was little incentive for an investor to convert bonds into stock. The low interest rate made it attractive to the company, and for investors, the stock price remained well under the $100 a share that could make conversion compelling, at least during the late 1950s and early 1960s when B&O; stock was actively traded.
Erratic Earnings
Moreover, the B&O;’s results were, like other rails at the time, erratic and gave little prospect for future vast gains. Earnings in the year the bond was issued were lower than they had been in 1952, though higher than in subsequent years. Profits rose a healthy 14% in 1957 and then began a protracted decline that bottomed out in 1961 with a $13.25-a-share loss.
The company returned to the black in 1963, and despite being acquired by a corporate parent, known at the time as the Chessie System Railroads, its results continued to be reported independently. But the bottom line had little credibility on Wall Street, said an analyst, because it could be dramatically affected by Chessie’s decisions in allocating costs, revenues and traffic routes.
With most of the equity now consumed within a larger corporation and financial reporting questionable, the shares drifted into the extensive netherworld of obscure securities. The M.C. Horsey & Co. guide, a standard brokerage reference, last charted the B&O;’s price in late 1966, when it was a little below $30 a share.
The Real Estate Aspect
The price of the remaining outstanding shares continued to be tracked, however, by a small circle of investors, for it retained some interesting characteristics--most important real estate. The property had been acquired, often cheaply, as far back as the 1820s. Many of the parcels, say litigants in the current dispute, were valued on the B&O;’s balance sheet at only a fraction of current worth. Moreover, from an operating point of view, the B&O; remains viable. Much freight now carried throughout the CSX system on lines once part of the Chesapeake & Ohio Railway and the Western Maryland Railroad originates and terminates on the B&O; and, were the corporate affiliation different, it could go elsewhere, most notably Conrail, said one longtime rail bond analyst.
During the mid-1970s, CSX shifted some real estate out of the B&O; and put it into a separate largely controlled subsidiary named Mid Allegheny Corp. B&O; stockholders received shares of Mid Allegheny, but the convertible bondholders did not.
Retroactive Conversions
After years of rancorous litigation, a court ruling gave some of the convertible bondholders the right to retroactively convert their holdings into B&O; and Mid Allegheny stock at the old 10 shares per bond formula. Mid Allegheny almost never changes hands, but pressed for a quotation, a trader familiar with the issue offered $50 a share. He added, however, that the market was so thin, and the public information on the underlying parcels so scant, that determining a fair price was almost impossible.
In 1986, CSX announced a broad restructuring that included the dissolution of the B&O.; It included the forced conversion of the bonds and the repurchase of all outstanding stock, at a price of $113 a share. In the spring of 1987, after receiving a report from its longstanding investment bank, Morgan Stanley & Co., it made what it called a final offer of $124 a share.
With almost the entire company already owned by CSX, there was no likelihood of an alternative bidder, leaving the courts as the only avenue for challenge. Suits were filed by no fewer than 17 lawyers representing shareholders from around the country and the difference of opinion is vast.
A point made by many of the litigants is that at the time of buyout, the B&O;’s book value was well in excess of $300 a share. And because some contend that includes largely undervalued real estate, and has been adversely affected by a number of accounting maneuvers by CSX, the actual purchase price should be far higher.
Shares’ Value Estimated
One litigant, who, like several others, requested anonymity because of continued business relationships with CSX, values the shares at least $650 a piece and makes a case for $900. Richard Smith, president of the OTC Securities Fund, a Ft. Washington, Pa.-based mutual fund that specializes in little-known issues, contends the B&O; shares are worth at least $300 to $500 a piece. Though not involved in the current suits, his firm held stock in the B&O; at the time of the buyout and continues to monitor the court proceedings.
The litigation has been slowly wending its way through the judicial system since the original suits were filed in early 1987. In a victory for the minority shareholders, the Baltimore district court has agreed to consider assessments of the B&O;’s worth from three appraisers, one appointed by the shareholders, another by the company, and a third mutually agreed upon. A hearing on the results is not expected until January, or later, and few expect a speedy conclusion thereafter.
