Conrail vote scenario 'certainly appears strange' If proxies don't favor CSX, then, well, there's no vote


PHILADELPHIA -- As elections go, this one might have been devised in the old Kremlin.

Conrail shareholders are scheduled to vote Dec. 23 on a proposal that will likely decide the Philadelphia railroad's future. If they approve the management-endorsed proposal, Conrail's planned $8.5 billion merger with CSX Corp. will move forward.

If the shareholders don't approve they won't vote.

In proxy materials mailed out last week, Conrail first invites shareholders to attend the special meeting and then says plainly, "It is expected that the special meeting will not be convened if Conrail has not received sufficient proxies to assure approval of the Proposal."

Instead, the proxy says, Conrail will simply postpone the referendum until after it has commitments from enough shareholders to approve the question. In other words, count ballots first, then hold the vote -- after we've won.

If it sounds a bit undemocratic, well that's politics. More to the point, that's business, according to analysts, who say Conrail's election rules are only modestly unusual in the dog-eat-dog game of mergers and acquisitions.

"To the public eye, it certainly appears strange," said Michael Useem, a Wharton School professor who specializes in corporate governance.

"[But] anything goes when this much money is at stake, as long as it's within the law."

The battle for Conrail has become one of the most watched takeover struggles of the year, both for the enormous amounts of money involved and because it is expected to help determine the shape of the U.S. railroad industry in the 21st century.

The only legal challenge thus far to Conrail's merger plans failed last week, when U.S. District Judge Donald VanArtsdalen dismissed lawsuits brought by dissident Conrail shareholders and by Norfolk Southern Corp., CSX's rival suitor for Conrail.

VanArtsdalen approved a wide array of defensive tactics that Conrail and CSX are employing against Norfolk Southern, which has offered to pay about $10 billion to acquire the Philadelphia railroad.

The ruling left Norfolk Southern to try and thwart the deal by appealing directly to Conrail shareholders to vote against it at the Dec. 23 meeting.

Indeed, many Conrail shareholders are furious with the company for binding itself to CSX when Norfolk Southern's bid is $1.5 billion more. Stoking their anger is the fact that CSX is buying Conrail in a "front-loaded," two-part offer: The Richmond company is paying $110 a share for 40 percent of Conrail's stock but offering to swap CSX stock worth only about $85 a share for the rest, making a blended offer of about $95 per share.

Norfolk Southern has offered to pay $110 in cash for all of Conrail shares. Shareholders are stymied from taking the Norfolk offer because of "poison-pill" provisions in Conrail's bylaws, which would flood the market with new stock if triggered. That can be changed only by Conrail's board, and the board has pledged not to do anything to derail the CSX deal before next July at the earliest.

CSX won an important round last week in Judge VanArtsdalen's court. The judge's ruling enabled CSX to complete a tender offer for 19.9 percent of Conrail stock, which CSX bought at $110 per share or almost $2 billion. To buy more, CSX needs Conrail shareholders to approve a charter change, removing the company from a provision of Pennsylvania's anti-takeover law.

Thus the vote on Dec. 23 -- or whenever.

Flexible scheduling isn't the only thing CSX has going for it. The company already has many of the votes it needs in its pocket.

Start with the 19.9 percent CSX acquired in the tender offer. Another big block of stock, around 13 percent, is held in trust for Conrail employees and managers. Proxy experts say those shares are likely to line up with the management-approved CSX deal.

Moreover, the charter change can win with only a majority of those shares voting, not an absolute majority.

Analysts estimate that at most, 80 percent to 90 percent of shares will be voted, so CSX can win with 40 percent to 45 percent of all Conrail shares.

All that leaves CSX scrambling to win the votes represented by as few as 15 percent of Conrail shares.

One way to do that, many analysts say, is by raising its bid. The large institutions and arbitrageurs who own most remaining Conrail stock say CSX must approach or meet Norfolk Southern's offer or risk losing the deal. "There's clearly a superior bid on the table," said Peter Gleason, an adviser to institutional shareholders.

But people familiar with CSX's position said the Richmond company is so confident of its upper hand that it is considering not raising its offer at all. Since the vote can be postponed or rescheduled as often as necessary, "one approach is just to leave the offer where it is and see how you do," one source said.

CSX's confidence grew after Judge VanArtsdalen ruled that Conrail's defenses against a hostile bid are, indeed, bulletproof, the source said. That should have convinced investors that Norfolk Southern can't win under any circumstances.

"The legal decision was a very clear statement that the [Conrail] board had full discretion, and there's no reason at all to consider that Norfolk Southern is a viable alternative."

That position conflicts with what Conrail itself has been telling investors. The Philadelphia railroad said publicly that it and CSX "have been having discussions relating to an increase in the value of" CSX's final offer.

People familiar with Conrail's position say CSX should not get so cocky that it risks the deal it has.

"If CSX does not step up to the plate, that would not be a wise move for CSX," said one. "If they don't increase, they put themselves at risk of losing the Conrail board. Why would they want to do that when they're on the verge of winning?"

Pub Date: 12/03/96

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