Santa Fe Industries Chairman John Schmidt told New York financial analysts yesterday that his company will consider purchasing Conrail from the federal government.
A combination of Conrail and the Atchison, Topeka & Santa Fe would create the nation's first transcontinental railroad and the second longest (after the Burlington Northern) in miles operated, and could be the first move in a final realignment of the nation's seven remaining large railroads into three or four larger ones.
Schmidt's announcement, though far short of being a formal offer, makes the federal government's attempt to sell Conrail a much more interesting proposition and could force the hand of other railroads that have coveted parts, if not all, of Conrail's northeastern trackage.
The only formal offer to buy Conrail has come from its employes, through the Railway Labor Executives Association (RLEA).
Schmidt told the New York analysts that Santa Fe's "next plan is to do something about increasing the size and the market power of the railroad. . . . It is time for action, and if a proper combination can be effected, which will enhance our stockholders' long-term interest, it will be done." Schmidt said he told the U.S. Transportation Department and Conrail Chairman L. Stanley Crane "that I will take an in-depth look at Conrail."
DOT has hired the investment banking firm of Goldman, Sachs & Co., which has contacted as many as 20 different firms or individuals to solicit interest in Conrail, according to senior DOT officials. "We have had a couple of inquiries from others," said DOT General Counsel James H. Burnley. "Obviously, Santa Fe's chairman's statement today puts them in a different category."
Burnley and other federal officials said they were delighted at Santa Fe's interest, if for no other reason than that it could result in a genuine auction for Conrail, which has been propped up with more than $3 billion in taxpayer subsidies since it was created from the rubble of the bankrupt Penn Central and six other northeastern roads in 1976.
In the last three quarters, however, Conrail has made money. Its second-quarter report showed net income of $97.2 million, the highest in the railroad's history, and $93.8 million of it came directly from railroad operations, Crane said.
Santa Fe has been known to be looking for a merger partner for some time; it has negotiated over the years with the Western Pacific and the Southern Pacific, but to no avail. It is widely rumored to be interested in purchasing the smaller Denver & Rio Grande Western to solidify its western standing.
Early this year, 5 percent of Santa Fe Industries stock was purchased by the Norfolk Southern Corp., which is also considered by some railroad analysts to have a natural interest in Conrail. Norfolk Southern told the Securities and Exchange Commission in March that it has no "present intention to seek to acquire control" of Santa Fe Industries.
Andras Petery, transportation analyst for Morgan, Stanley and one who attended Schmidt's briefing, said he regarded Schmidt's statement as "a serious expression of interest." Acquisition of Conrail by Santa Fe, he said, could "play a key role for Santa Fe to make a competitive response" to last year's big western merger between the Union Pacific and the Missouri Pacific.
Santa Fe and Conrail share a substantial amount of east-west traffic, primarily general merchandise. They have a major interchange operation in Streeter, Ill., and thus bypass the Chicago snarl.
Brian M. Freeman, financial adviser to the employes' group attempting to buy Conrail, said the Santa Fe expression of interest cannot be taken seriously "until they put something on the table."
If that happens, he said, the employes' group will take a look at it. It is clear that the employes will have an important role in whatever Conrail deal is worked out, because Conrail's dramatically improved financial showing is attributable in part to significant concessions from labor.