Conrail, CSX Plan Merger Valued at $8 Billion

By MICHAEL A. HILTZIK

Oct. 16, 1996 12 AM PT

TIMES STAFF WRITER

Signaling the resurgence of a rail industry declared moribund just a few years ago, CSX Corp. on Tuesday bid $8 billion in cash and stock to buy Conrail Inc., the rail freight system cobbled together by Congress from the husks of six bankrupt lines in 1976.

The companies said the proposed merger would create the largest transportation company in the world, with an estimated $14 billion in annual revenue, 52,000 employees and 29,000 miles of rail serving 22 states, mostly east of the Mississippi. The company would also own some of the nation’s largest container and barge operations.

The merger, if approved by federal authorities after what could be a full year of scrutiny, would leave the U.S. with only six major freight railroads where scores once existed.

Among those whose disappearance would be cemented by the deal are some of the country’s most storied rail lines. Conrail was designed to rescue from oblivion the Penn Central Rail Road, which was formed by Cornelius Vanderbilt from a merger of the Pennsylvania and New York Central lines.

It may also hasten the rail industry’s move toward what many analysts now consider inevitable: the creation of at least one giant transcontinental rail line linking the Union Pacific or Burlington Northern Santa Fe--the West Coast’s major carriers--to a large partner serving the East and Midwest.

“Everyone can still get bigger,” said Charles Meyer, portfolio manager of the $4-billion Invesco Industrial Income equity fund, which holds 600,000 Conrail shares. A transcontinental merger, he said, “will probably happen before the turn of the century.”

Shares of Conrail rose $14.125 to close at $85.125 in trading on the New York Stock Exchange, reflecting the hefty premium offered by Richmond, Va.-based CSX. CSX shares fell $2.75 to close at $46.75, also on the Big Board.

Spokesmen for the two companies said the merger would allow the firms to pare about $550 million in annual costs by combining operations. Eliminating overlapping routes and line-to-line transfers would make the combined company more competitive with truck transport serving such metropolitan areas as New York, Boston, Miami, Atlanta and New Orleans, the companies said.

Under the terms of the offer, CSX would pay $92.50 a share for 40% of Conrail’s outstanding shares. The remaining 60% would be acquired for stock at an exchange ratio of nearly 1.86 CSX shares for each Conrail share. At Tuesday’s closing price, that sets the total value of the offer at about $8 billion.

Industry analysts noted, however, that the terms could change in response to objections or even a higher bid from other major rail lines--principally Norfolk, Va.-based Norfolk Southern, which is regarded as CSX’s chief competitor and has long pursued a merger with Conrail.

In a statement, Norfolk said the proposed CSX deal “raises serious concerns” about the competitive balance of the railroad industry on the Eastern Seaboard. Analysts said that to allay Norfolk’s concerns, CSX might choose--or be forced by regulators--to spin off some of Conrail’s operations to its rival.

Industry observers said Tuesday’s announcement underscores how strongly the rail business has recovered from its nadir in the 1960s and ‘70s, when marginal lines folded virtually on a weekly basis.

The rail business was so near collapse that an act of Congress was required to arrange a merger a fraction of this one’s size. That was the 1976 creation of Conrail from vestiges of the Penn Central and five other bankrupt Northeastern lines. In its first five years, the new government railroad cost taxpayers about $7 billion in subsidies and ran up losses of $1.6 billion.

By 1987, however, labor concessions, the elimination of marginal routes and a modernization program had turned the line profitable. That year the federal government sold its 85% stake to the public for $1.65 billion--then the largest initial public offering of stock in U.S. history.

Soon after, the positive effects of transportation deregulation began to percolate throughout the entire industry, in part by enhancing the rail operators’ ability to compete with interstate trucking.

Now “all these lines are doing terrifically,” in the words of Cornelius V.V. Sewell, transportation analyst for Argus Research.

The major U.S. railroads made a total of $3.8 billion on $40 billion in revenues last year. CSX earned $727 million on revenue of $10.5 billion, and Conrail earned $419 million on revenue of $3.7 billion.

Now, said Sewell, the only way for the survivors of the rail shakeout to expand and grow is through acquisition.

In that process Conrail has long been considered a likely acquisition target because it was saddled with a particularly high proportion of short routes within the heavily traveled Northeast region.

“There’s always a cost advantage for longer lines,” said Sewell, noting that a combined CSX-Conrail would allow the merged company to carry freight longer distances without handing it off from company to company.

In fact, the latest merger deal follows what many analysts thought would be the last for a long time: Union Pacific’s $3.9-billion acquisition of Southern Pacific Corp., approved by federal regulators in July.

In retrospect, however, the willing approval of the Union Pacific deal by the government’s Surface Transportation Board--over antitrust objections from the Justice Department--signaled that the board would look kindly on further mergers involving the majors. The UP merger created the nation’s largest railroad.

“What’s the optimum number of railroads in this country?” asked Meyer. “Fewer than we have now.”

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Converging Tracks

CSX Corp.’s $8.4-billion offer for Conrail Inc. would create the nation’s third-largest railroad, with all lines concentrated in the Eastern U.S. A look at the companies:

Conrail Inc.

Headquarters: Philadelphia

Chief executive: David M. Levan

Employees: 23,510

Miles of track: 11,000

1995 revenue: $3.7 billion

1995 earnings: $264 million

CSX Corp.

Headquarters: Richmond, Va.

Chairman: John Snow

Employees: 47,965

Miles of track: 18,645