Conrail: Which track? How much steam?

Uncle Sam wants out of the railroad business. Transportation Secretary Elizabeth H. Dole wants to get him out by selling the Consolidated Rail Corporation (Conrail), 85 percent government-owned, to the Norfolk Southern Corporation.

Norfolk Southern, headquartered here, is eager to buy. The Reagan administration picked this railroad holding company last February as the Conrail awardee, citing its tradition of sound management and profitability and its ``deep pockets.''

After spending billions putting Conrail on the right track, the government does not want to have to stage another bailout.

``We can bring strength, which is needed, into the Northeast, and assure that the Northeast, hopefully, will never again have to go through the trauma of a Penn Central bankruptcy,'' says Norfolk Southern chairman Robert B. Claytor.

``The basis for our being chosen, I think, was that we offered long-term prospects for stable transportation in the Northeast.''

But last week, the Reagan administration's plan to sell Conrail struck an apparent setback. The Interstate Commerce Commission said two regional railroads -- the Guilford Transportation Company and the Pittsburgh & Lake Erie -- could be driven out of business by the proposed Conrail-Norfolk Southern deal.

In Richmond, Hays T. Watkins, chairman of CSX Corporation, Norfolk Southern's archrival rail company, is at the head of a long line of protesters opposed to the sale.

Critics of the Conrail-Norfolk Southern union favor a proposal developed (after the Department of Transportation's selection of Norfolk Southern) by Morgan Stanley, the investment banking concern.

Morgan Stanley has put together a group of 32 private investors (including CSX, whose shares would be held in trust), who would buy the system and then take it public, as an independent company, through an offering of stock within five years.

``The feeling is that the Morgan Stanley proposal, which preserves competition, seems to be far more attractive to the shippers, and to the states and governments involved, than having in effect a monolith of this gigantic combined company,'' Mr. Watkins says. ``It's a question of competition -- shippers thrive on it. As long as there are three systems in the East, there's some competition.''

Mr. Claytor counters that 80 percent of the freight business in the Northeast travels by truck. ``Anyplace where a railroad is competing with trucks, especially in the Northeast, it does not have a monopoly.''

Be that as it may, CSX's Watkins says that if Conrail is taken over by Norfolk Southern, ``Our position is that we would withdraw from the Northeast.''

Conrail now carries as much freight as the two rivals combined; a Norfolk Southern-Conrail combination would have 3-to-1 dominance over CSX, Watkins maintains. ``People say we're going to pick up our marbles and leave. Well, what we're going to do is protect our shareholders' money.''

E. Morgan Massey, chairman of A. T. Massey Coal Company, a major coal shipper from the Appalachian mines through the ports of Virginia, is one of a number of shippers opposing the sale.

Having one through-rate for a load of coal from Kentucky to New York City -- as Mr. Massey would get if Norfolk Southern bought Conrail -- would be a plus. But under the Staggers Rail Act, Massey complains, there is no regulatory mechanism for controlling rates for the captive shipper. ``That has to be fixed in one of two ways -- either effective competition or effective deregulation.''

A further criticism of the proposed sale is that Norfolk Southern would get Conrail for a song.

While $1.2 billion may be a fair price for Conrail as an independent company, it would be a terrific bargain for an operating industrial company buying Conrail and merging it into its own corporate fold. Norfolk Southern would get so many tax breaks as to win the railroad for nothing, according to one scenario.

Claytor counters, ``The tax attributes of this transaction are important, but by no means more than $100 million.''

An even more difficult question -- because it seems to require a crystal ball to answer it -- is that of the long-term viability of Conrail. Can Conrail make it without Uncle Sam?

Time was when railroads were in the news mainly when they were going bust or were being preventively merged. The ghost of the Penn Central -- one of Conrail's corporate ancestors -- still seems to stalk the Northeast rail corridor.

It seems almost reflex action to expect a railroad to get into trouble eventually.

Conrail has been doing well lately, but it's not as if it has had years and years in the black.

Indeed, Mr. Watkins himself, now a staunch backer of the Morgan Stanley proposal, expressed doubts a while back on the viability question. ``We, like many people, had a concern that over the long pull, five to 10 years, Conrail was vulnerable,'' he says. ``I expressed that in a letter to Mrs. Dole. . . .'' Now, though, ``Our feeling is that Conrail is viable certainly for at least 10 years.''

Explaining the change (or modification) in his views, he points to Conrail's recent earnings history: ``In 1982 they earned a profit, but we weren't sure how long that would last; 1983 was a better year, but it was really when we saw [the figures for] 1984 and early 1985'' that CSX felt Conrail was truly out of the woods.

But Thomas A. Saunders III, managing director of Morgan Stanley, sees the viability issue as a mere pretext for pushing through a grievously anticompetitive sale of Conrail. ``Norfolk Southern will get Conrail for free! Why attack the viability of Conrail? Because it's the only justification for creating all the [competitive] problems'' of a Norfolk Southern-Conrail merger.

Morgan Stanley, which first got involved in Conrail as adviser to Conrail management, kept ``getting batted off the table,'' Mr. Saunders says, with its proposals to sell the government's Conrail stock directly to the public, similar to the British government's sale of British Telecom.

Morgan Stanley had just come from handling the North American portion of that world's-largest-ever stock offering; its people were feeling bullish on the prospects for success with a stock offering as large as Conrail's would have to be.

The Reagan administration, however, was not. And so, over the past several months, the idea of a consortium to buy Conrail as an intermediate step, now shielding the government from market risk, was developed.

``Now,'' Mr. Saunders says, ``the criticism of the Morgan Stanley plan is that people don't want us to get all the profits from the public offering.''

Whichever approach prevails -- the Department of Transportation's or Morgan Stanley's -- the sale must be handled by act of Congress; both sets of bills have been on hold while Congress was on recess. Both sides are politicking aggressively, though.

Norfolk Southern's Claytor observes, ``The political process was certainly not designed to pass on the merits of a corporate transaction, which is what's involved here.'' But he adds, ``I am cautiously optimistic that we will prevail.''

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