More Ammo for Norfolk Southern

Norfolk Southern Corp. has returned to its bank group for reinforcements in its hostile bid for control of Conrail.

Late last week, the bank group led by J.P. Morgan & Co. and Merrill Lynch & Co. boosted Norfolk Southern's loan to $12.5 billion, from $11.5 billion. The funds would back the railroad's revised offer of $110 per share, up from $100.

Although Norfolk Southern's rival, CSX Corp., raised the cash portion of its bid late last week, it has not renegotiated its $4.8 billion loan. The loan for CSX's friendly bid is led by Chase Manhattan Corp., NationsBank Corp., BankAmerica Corp., and Bank of Nova Scotia.

Norfolk Southern's new loan package marginally increases the fees banks will receive for a deal whose attractive rewards had already generated strong interest among bankers.

The new Norfolk Southern loan increases the fees by 10 basis points for each commitment level. Morgan and Merrill are still looking for commitments ranging from $500 million down to $25 million. Both lead banks maintain a $2 billion underwriting.

The lead banks are also offering an additional 12.5 basis points on the drawn cost if Norfolk Southern's senior debt and bank loan ratings from Standard & Poor's Ratings Group and Moody's Investors Service drop to BB- plus or BB.

Prior to the increase in the deal size, the $500 million and $250 million tiers had already been filled.

The banks that committed at either of the top tiers will have the opportunity to recommit to the deal at the same level with the higher fees.

Each of the 18 banks that committed $500 million will be eligible to receive a $1 million flat fee and a $200,000 early bird fee if they maintain the same level of support for the larger deal.

Norfolk's lead banks had increased the deal size by late Friday and had already received six senior managing agent commitments by Monday.

The deadline for the $12.5 billion loan is still Thursday.

"The larger loan is going to be very well-received," said Parker Knight, a managing director in loan syndications at Union Bank of Switzerland. "I'm sure they could go further with no problem."

Some bankers expressed doubts about Norfolk Southern's intent to pay the rich fees.

Technically, the railroad company doesn't have to pay the banks until it accepts the commitments.

"Norfolk Southern will accept the commitments after they allocate, which should be in a couple of weeks," Mr. Knight said.

He remains confident that the railroad will compensate its bankers.

Were Norfolk Southern to increase its bid further, it would need to return to its bank group, said bankers familiar with the transaction.

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