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US spinoffs to private sector on track? Selling Conrail, long blocked in Congress, could be a start

By Barbara BradleyStaff writer of The Christian Science Monitor / September 8, 1986


President Reagan and his team arrived in Washington with grand hopes -- illusions, as it turned out -- of selling off bits and pieces of the government. ``For sale'' signs would soon hang on post offices, petroleum reserves, hydroelectric facilities, railroads, and billions of dollars' worth of loans. But Congress resolutely rebuffed their efforts.

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Now, however, the government is on the verge of its first victory. It's about to sell a railroad.

Investment bankers, who stand to gain a good deal of business if ``privatization'' takes off, say the sale of the freight carrier Conrail will be the kickoff for more such deals.

``A public offering of Conrail will be a real boost to privatization in the US,'' says Jay Moorhead, a vice-president at E. F. Hutton & Co., which is forming a group to work on advising or participating in the sale of government assets. A successful sale, he says, ``will alleviate many congressmen's and senators' concerns about potential problems with other asset sales.''

But people on Capitol Hill are more cautious. ``There may be a flurry of interest, but as people look at [each individual case] it becomes more and more difficult,'' one congressional aide says.

Conrail has become a symbol of the government's frustration over transferring services and assets to the private sector.

It seemed a prime candidate. It had a history of private ownership. Created by combining six bankrupt railroads in 1976, it had turned its losses into profits, which were nearly $450 million last year. And it attracted several bidders, including Norfolk Southern, the Department of Transportation's choice for owner.

But the House, concerned about employees' jobs and the loss of competition that a sale to Norfolk Southern would mean, resisted the railroad's $1.9 billion bid for 18 months. Two weeks ago, the private railroad withdrew its offer.

Ironically, the Norfolk Southern setback may put the President's privatization agenda back on track. Over the next two weeks, Transportation Secretary Elizabeth Dole will try to reach an agreement with congressional leaders to sell the government's 85 percent stake in Conrail to the public.

Though there's little time before the term ends in October, many on Capitol Hill think the two sides will reach an agreement.

The sale of Conrail would come none too soon. ``The Reagan people have '87 but probably don't have '88'' to get privatization off the ground, says an investment banker working on the Conrail sale.

``They need that one big success to convince people that many of the dangers [of selling government assets] simply don't exist,'' says Ronald Utt, deputy chief economist at the United States Chamber of Commerce. ``Conrail is no guarantee that others will follow, but it will help.''

With record deficits, Congress may be more amenable to such sales. ``Gramm-Rudman is what places this issue on top of the pile,'' says Mr. Moorhead.

Conrail could fetch anywhere from $1.7 billion to $3.6 billion on the open market, making it the largest initial public offering in United States history. If it is done shrewdly, says another investment banker involved in the Conrail deal, it will create an appetite for more such deals.

``The administration will be very conservative, because it wants [the Conrail sale] to be a success,'' he says.

He expects the government to adopt the British strategy in selling British Telecom in 1984. That was the largest public offering in British history (about $6 billion), and Prime Minister Margaret Thatcher's government priced the shares very competitively and they were bought up right away. On the first day, the share price nearly doubled.

This investment banker thinks the Reagan administration will put a $2 billion price tag on Conrail, even though the Congressional Budget Office has valued it at $3.2 billion to $3.6 billion. Even if the CBO figure is discounted by 15 percent, which is typical of initial public offerings, that is still about $750 million low.