CSX, Conrail Reach New Merger Terms
Conrail Inc. on Wednesday revised its takeover agreement with CSX Corp. to give shareholders more cash in the proposed railroad merger valued at nearly $8.5 billion.
The new terms immediately drew fire from investors who said the value of the cash-and-stock deal remained well below that of the rejected offer from unwelcome bidder Norfolk Southern Corp.
Philadelphia-based Conrail, which announced its original offer Oct. 15, said its board had considered the merits of the rival bids and reaffirmed that a merger with CSX was a superior strategic combination, despite the higher offer from Norfolk Southern.
“Our two companies have now agreed to significantly increase the value to be received by the Conrail shareholders, and Conrail’s other constituencies will continue to get tremendous benefits resulting from the CSX merger,” Conrail Chairman David LeVan said in a statement.
A source close to the companies said the Conrail board met until late Tuesday night and the two companies then hammered out the new agreement in the early morning hours Wednesday.
A merger of CSX and Conrail would create one of the largest transportation companies in the world, including a rail system with 29,000 miles of track in 22 Eastern states.
Under the revised offer, Richmond, Va.-based CSX would pay $110 cash per share for 40% of Conrail shares instead of the previously announced amount of $92.50. The remaining 60% would be exchanged at the original ratio of 1.85619 CSX shares for each Conrail share.
Based on CSX’s current stock price, the deal values Conrail shares at about $93 each, or $8.46 billion, compared with the original pact of $8.42 billion, market sources said.
Norfolk Southern has offered to pay $100 a share in cash, or $9.1 billion, for all of Conrail’s outstanding shares.
Conrail’s stock gained $1.375 to $93.625 in Wednesday’s trading on the New York Stock Exchange.
Norfolk, Va.-based Norfolk Southern shares lost $1.875 at $87.125 on NYSE.
In a separate development, the chief executive of Union Pacific Corp.’s railroad unit, Ronald Burns, was forced to resign because of a dispute with top management on how to run the railroad, sources said.
Richard Davidson, president and chief operating officer of Union Pacific Corp. and chairman of the railroad unit, will replace Burns as the unit’s chief executive, Union Pacific said in a statement. Jerry Davis, president of Union Pacific’s newly acquired Southern Pacific rail unit, will become president and chief operating officer of UP railroad.
CSX Chairman John Snow said the company’s decision to raise its cash offer followed an analysis that identified at least $730 million in cost savings in a CSX-Conrail combination--$180 million more than originally anticipated.
“Clearly, the combination of CSX and Conrail provides the best overall package of benefits to our constituencies, including customers, the communities we serve and the public at large,” Snow said.
But Conrail stockholders expressed opposition to the deal in a conference call with investors and Wall Street analysts. They said the new terms effectively offset recent erosion in CSX’s stock price and do not significantly raise the value of the transaction.
“Some of the shareholders were really angry and said this was being crammed down their throats,” said one expert on takeovers who listened to the conference call.
Other sources who participated in the call said several investors threatened to tender their shares for $110 and then vote against the proposed merger.
In addition to the price of the CSX deal, investors were also unhappy with a three-month extension of the time in which Conrail is locked into the deal. The revised pact says Conrail cannot withdraw or agree to a competing bid before July 12.
“It’s an outrage. This thing is now locked up tighter than ever,” said another participant.
“It is clear to me that CSX and Conrail intend to continue their joint efforts to railroad Conrail shareholders into accepting a proposal significantly inferior to Norfolk Southern’s $100-per-share all-cash tender offer,” Norfolk Southern Chairman David Goode said in a statement.
“Until CSX acknowledges that all Conrail shareholders are entitled to the $100 cash that they can only receive from Norfolk Southern’s offer, any discussions between us are a waste of time,” Goode added.
The CSX-Conrail announcement also said that a Conrail shareholders’ meeting scheduled for Nov. 14 had been canceled, with a new meeting expected to be held in mid-December.
