When two giant railroad companies merged in 1981 into the nation's largest railway system, they called the new company the CSX Corp.--"C" for the Chessie System, "S" for Seaboard Coast Line Industries and "X" for assorted non-railroad properties included in the deal.

Since the merger, the Richmond-based CSX Corp. stripped the "X" of what little meaning it had w0020 ----- r f BC-06/20/83-CSX 3takes 06-20 0001 CSX Primes for Merger Battle By Stuart Auerbach Washington Post Staff Writer

When two giant railroad companies merged in 1981 into the nation's largest railway system, they called the new company the CSX Corp.--"C" for the Chessie System, "S" for Seaboard Coast Line Industries and "X" for assorted non-railroad properties included in the deal.

Since the merger, the Richmond-based CSX Corp. stripped the "X" of what little meaning it had by selling off many of the properties carried under that loose heading. Earlier this month, however, CSX acted to strengthen its X factor with a $1 billion offer to buy Texas Gas Resources Corp. of Owensboro, Ky.

Besides taking a giant step toward becoming one of the country's major transportation and natural resource companies, CSX assumed the position of "white knight" in what is shaping up as a major takeover battle. CSX appears at first blush to have thwarted a hostile takeover attempt of Texas Gas by the hard-charging Coastal Corp. of Houston by coming through with a better offer for Texas Gas.

All sides have positioned themselves for a major merger battle, but it remains unclear how the fight will develop beyond its present stage of bobbing and weaving. Suits filed in federal courts by both Texas Gas and Coastal Corp., for instance, are seen as "perfunctory" holding actions by analysts here, in Houston and Richmond and on Wall Street.

On Friday, Coastal struck an expected blow, petitioning the Interstate Commerce Commission to require CSX to get prior ICC approval for the takeover and to order an investigation of the railroad corporation's finances. CSX officials characterized the petition as "frivolous" even as they prepared to defend against it.

The main action in the takeover battle appears to have shifted to the corridors of Washington where Coastal, playing the kind of hardball for which it is noted in the rough-and-tumble atmosphere of Houston's oil and gas business, has sent its legal and political operatives to raise questions of possible violations of antitrust, interstate commerce and shipping laws arising from the combining of CSX and Texas Gas.

CSX is the nation's largest railroad, with 20,000 miles of track in 22 states in the eastern and north central regions of the country. It also has energy concerns as America's largest hauler of coal. Texas Gas--a gas pipeline and oil and gas exploration and production company--owns truck and barge subsidiaries that it and CSX recognize pose special legal problems to their merger.

With two such regulated companies "there's bound to be something Coastal can push," said Michael Mead, who analyzes CSX Corp. for the Richmond brokerage firm of Scott & Stringfellow.

"Coastal's Washington activities are a normal, expected maneuver by anyone in a takeover game. They are trying to get some legal block," said Ann Mobley, who analyzes Coastal Gas in E. F. Hutton's Houston office.

It appears to be especially important for Coastal Gas to get some government help in blocking CSX's purchase of Texas Gas, since the Houston company is not believed to have the financial resources to match CSX's deep pockets.

"Obviously, they don't want to compete on a dollar basis," Mobley said.

Coastal has assembled a high-powered group to help in its fight against the merger, including the New York law firm of Skadden, Arps, Slate, Meagher & Flom, which specializes in takeover battles, and John White, a former Texas official and ex-chairman of the Democratic National Committee.

CSX generally maintains a low profile, though it is now trying through advertising to project its corporate identity. True to form, it has kept quiet about the possibility of a merger fight with Coastal Gas. But officials of the railroad firm maintain they are ready to take Coastal on at whatever level it wants. "It's up to Coastal," said one ranking CSX official.

"We're holding tight but we're in it to win. Otherwise, we wouldn't have made the move to buy Texas Gas. We have the resources and we think it's a good fit," the CSX official said.

Texas Gas, whose spokesmen acknowledged that it would rather remain an independent company, made clear that it preferred being taken over by CSX than Coastal Gas. "Coastal just isn't a company we want to become involved with," said the Texas Gas spokesman.

Coastal's two main challenges are expected to revolve around the merger's antitrust implications and CSX Corp.'s alleged violations of ICC regulations.

Coastal attorneys were reported to have pressed the company's case for the government to intervene on antitrust grounds in a meeting last Tuesday with Justice Department officials. At that meeting, they reportedly argued that a Texas Gas-CSX merger would concentrate control of the shipment of two competing fuels--gas and coal--in one company. This, Coastal attorneys argued, would allow CSX to affect the cost of both fuels, thereby restricting competition. This would be especially true in the Ohio River basin, where CSX runs the railway lines and Texas Gas the pipelines, they said.

Further, Coastal contended the merger could create a monopoly in the transport of bulk products including coal, phosphates, fertilizers, paper, metals, grain, soda ash and building materials, since CSX is the major railroad in the Ohio River region while a Texas Gas subsidiary, American Commercial Lines, is the biggest mover of bulk commodities along the region's waterways.

CSX and Texas Gas appear to have recognized the problems created by the barge subsidiary because, under the Panama Canal Act, railroads need ICC approval to own a barge line. Texas Gas said in the merger agreement filed with the Securities and Exchange Commission that it would establish a special voting trust for American Commercial Lines until CSX can get ICC approval to run the barge line.

Anticipating another potential antitrust problem, Texas Gas said it would go ahead with its previously announced plan to sell American Carriers Inc., a trucking subsidiary.

In its petition to the ICC, Coastal challenged the legality of the voting trust and asked the ICC to rule that the merger must be approved by the rail regulatory body before it can occur.

Coastal also charged that CSX misrepresented its financial position to the ICC in 1981. Under the Staggers Rail Act, Coastal claims, CSX was able to gain status as a "revenue deficient" railroad, which exempts it from rate controls. Supposedly, this would allow railroads to make enough money to continue to operate.

The petition poses the question of whether the corporation's railroads can be "revenue deficient" while "the holding company parent simultaneously offers to acquire a nontransportation enterprise for an aggregate cost exceeding $1 billion."

It is unclear just how far Coastal will get with these arguments, especially with the current confused antitrust and regulatory climate of the Reagan administration.

In further anticipation of some of these concerns, CSX and Texas Gas conformed with the Hart-Scott-Rodino Act by filing information with the antitrust division of Justice and the Federal Trade Commission about the proposed merger, according to the merger statement on file with the SEC.

The merger, if successful, would mark the second takeover this year of a gas pipeline company by a railroad: Burlington Northern, in what started as a hostile takeover that later became friendly, gained a controlling interest in El Paso Co.

And in the course of the past year, CSX and Texas Gas officials have held "informal contacts" over the possibility of some form of merger, the SEC filing said.

Coastal Gas, meanwhile, had been buying Texas Gas shares and, on May 20, rumors circulated that it was getting ready to spring a surprise takeover bid.

This prompted Texas Gas president Dennis R. Hendrix to call Coastal Gas chairman Oscar S. Wyatt Jr. to ask if the rumors were true. Wyatt replied that Coastal had "no current plans to make a surprise cash offer."

The rumors, nonetheless, were enough to spark Hendrix to resume talks with CSX. These talks broke off June 2, but resumed three days later--after Wyatt told Hendrix that Coastal now was planning a takeover bid.

Coastal's $450 million, $45-a-share bid to Texas Gas stockholders was made June 6. Texas Gas immediately filed suit in federal court in Houston to block the Coastal offer and, on June 7, accepted CSX's billion-dollar, $52-a-share open-arms bid for Texas Gas.

The Texas Gas suit charged that Coastal lacked the resources to complete the deal and would be forced to hold a "fire sale" of its assets. Texas Gas, moreover, accused Coastal of spreading rumors to encourage speculation in its stock.

Coastal fired back with a suit filed in U.S. District Court in Louisville that accused CSX and Texas Gas of using "fraudulent, deceptive and manipulative acts and practices" in reaching their merger agreement.

The purchase of Texas Gas, meanwhile, fits into CSX's long-term plans by allowing it to concentrate on its strengths--transportation and natural gas. As part of that strategy, it sold off unrelated businesses, including two Jacksonville, Fla., newspapers, thereby accumulating a cash surplus for new corporate purchases.

"CSX has been saying for some time that they perceive themselves as a transportation and natural resources company. Texas Gas is also in transportation and natural resources, so it fits into CSX's strategic plans," said John S. Pickler of Wheat, First Securities, a Richmond brokerage firm.