J.P. Morgan, Merrill Back A Hostile Bid For Conrail

A bidding war has erupted over Conrail Inc., with banks taking key roles on both sides.

Norfolk Southern Corp. announced a hostile bid Wednesday for the Philadelphia rail company, with J.P. Morgan & Co. and Merrill Lynch & Co. assigned to raise the $9 billion offer amount.

Norfolk Southern's offer amounts to $100 a share, topping CSX's bid last week of $92.50 per share.

The loan is the second in as many years in which banks have backed competing bids in a railroad merger. In a heated battle last year, Burlington Northern won Santa Fe Pacific railroad with backing of a loan led by Chase Manhattan Corp.

CSX announced Tuesday that its friendly bid was being partly financed with a $4.8 billion loan led by Chase, BankAmerica Corp., NationsBank Corp. and Bank of Nova Scotia.

In a weird twist, Norfolk Southern announced its hostile bid in an auditorium of Chase's headquarters building in New York. Norfolk Southern said the deal would give banks that don't have a relationship with Richmond, Va.-based CSX a chance to get involved in the merger.

Merrill and J.P. Morgan have each committed $2 billion to Norfolk Southern, which is based in Norfolk, Va., and the bank companies gave assurances that they could raise the additional $5 billion.

This would be the biggest loan to date for Merrill Lynch's two-and-a- half-year-old syndicated loan group. J.P. Morgan was the second-ranked syndicated lender in the third quarter, with $42.6 billion of deals.

Banks are "banging on the doors" to be a part of this syndicate, according to Raphael Soifer, a bank analyst at Brown Brothers, Harriman & Co..

Norfolk Southern estimated that combined assets of the two rail companies would exceed $29 billion and combined revenues would reach $9 billion.

"This merger is based on growth in business for rail traffic, and is extremely compelling," said David R. Goode, chairman and chief executive of Norfolk Southern.

In conjunction with the bid, Norfolk Southern initiated litigation to compel Conrail to open its books so the Norfolk company could "operate on a level playing field" with CSX and any other would-be acquirer.

"There are a number of barriers that need to be lowered by the board vote, or by litigation to win the agreement," Mr. Goode said. "We're in this to win."

Bankers supporting Norfolk Southern said that the CSX offer is anticompetitive because of the overlap between the CSX and Conrail systems. If CSX merged with Conrail, the combined company would have a 70% market share, whereas a Norfolk Southern-Conrail combination would control 60% of its market.

Strategically, a Norfolk Southern-Conrail merger would balance the eastern rail systems and enhance rail competition, said Mr. Goode. He said a CSX-Conrail merger would create a "single-mind monopoly."

CSX declined to say whether it would make a competing bid. Conrail advised its shareholders not to act until its board considers the new bid, adding that the board has already determined that a merger with CSX is in its best interest.

W.J. Romig, Norfolk Southern's treasurer, said Merrill and Morgan were able to offer competitive pricing and that their loan would expand on existing relationships between the company and the banks.

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