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Conrail Shareholders Face Tough Choice in Rail Battle

November 22, 1996

PHILADELPHIA (AP) _ Conrail shareholders, being wooed by two suitors for the Northeast freight railroad, face a tough choice next month.

Should they allow one suitor, CSX Corp., to buy another chunk of the company, making a merger between the two more certain?

Or should they hold out, hoping the other admirer, Norfolk Southern Corp., will come through with its higher offer?

CSX of Richmond, Va., completed the first stage of an $8.8 billion takeover of Conrail Inc. on Thursday after most stockholders tendered their shares.

But the heavy turnout for CSX’s cash-and-stock offer doesn’t reflect shareholder approval of that deal. Rather, shareholders who tendered want to make sure they get at least something, analysts following the merger saga said.

Norfolk Southern, based in Norfolk, Va., has made a $10 billion cash offer for Conrail but lost a court bid to stop CSX from proceeding with the first part of its cheaper deal. Norfolk Southern on Thursday extended its offer until Dec. 16.

The struggle has attracted widespread interest as a test of whether a company can sell itself to a lower bidder. Regardless who wins, the deal will be the biggest rail merger in history and reflects the improved fortunes of Conrail, a batch of once-tottering Northeast rail lines.

CSX only purchased about 20 percent of Conrail under its multiple-step takeover plan. Shareholders who would rather accept Norfolk Southern’s offer could still vote to block CSX from buying more stock.

Norfolk Southern’s offer is worth $110 a share. CSX’s offer is worth $110 a share on paper, but because it’s a combination of cash and stock the actual value is considerably less.

About 85 percent of Conrail’s outstanding shares were tendered by the midnight Wednesday deadline, when the stock was worth $96.78. CSX will purchase 17,860,124 shares of the 76,629,202 tendered.

All shareholders who tendered shares will receive cash for 23 percent and stock for the rest.

``The fact that the tender was so overwhelming oversubscribed was not a surprise,″ said Carole Neely, a rail analyst at Brown Brothers Harriman & Co. ``It’s not an indicator of support.″

Pittsburgh attorney William H. Clark Jr., who has advised Norfolk Southern on Pennsylvania laws, said he wasn’t surprised by the numbers, either.

``I would have expected more,″ he said. ``They’ve been caught in the classic prisoner’s dilemma.″

The real fight comes in December when shareholders vote on whether to allow CSX to purchase another 20 percent of the company.

CSX and Conrail executives together will have just over 20 percent to vote. Conrail employees have another 10 percent and are likely to vote for merger, analysts said.

Support from shareholders with the swing 20 percent might be difficult to obtain, the analysts said.

``There are still a large amount of shareholders who are displeased with CSX’s offer,″ Neely said.

Conrail operates an 11,000-mile network in 12 Northeast and Midwest states and the Canadian province of Quebec, and CSX runs more than 18,000 miles of track in 20 states in the East, Midwest, South and Ontario, Canada.

Norfolk Southern has a 14,400-mile rail system in 20 Southeast and Midwest states.

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