An investor group organized by Morgan Stanley & Co. increased its offer for Conrail by $200 million yesterday, a few days before the Senate is to consider the rival administration-backed offer from Norfolk Southern Corp.
Norfolk Southern's bid is $1.2 billion. The new offer is $1.4 billion and comes in a week that has seen heavy political logrolling from the factions involved in the lengthy, contentious Conrail fight.
"It is impossible to evaluate the announcement by Morgan Stanley until we know the source of the funds," Deputy Transportation Secretary James H. Burnley IV said.
Thomas A. Saunders III, managing partner at Morgan Stanley, answered, "The money is coming from the investors, including some we have not announced."
When asked if the increase was to avoid a loss in the Senate, he said: "Absolutely not. I'm not throwing in the towel in the Senate." Norfolk Southern is widely assumed to have the votes in the Senate if it can dispose of an expected filibuster. The House is considered too close to call.
Edward T. Breathitt Jr., Norfolk Southern vice president in charge of getting his company's bid through Congress, said, "Our offer, when you put it on the basis of public policy value, is about a $2 billion offer."
He said Norfolk Southern has no plans to increase its offer and that divestitures of track or track-use rights Norfolk Southern has agreed to make to competing railroads after it acquires Conrail will cost "about $200 million annually."
Conrail itself supports the Morgan Stanley offer because it would keep Conrail independent and retain the current management. Conrail said through a spokesman that it was gratified by the announcement, which "recognizes the obvious increase in value attributable to Conrail's 1985 financial performance and the substantial improvement in market value of railroad stocks."
To satisfy Norfolk Southern's insistence that Congress make substantial progress on sales legislation by the end of last year, Senate Majority Leader Robert J. Dole (R-Kan.) announced as the Senate was leaving for Christmas that the Conrail sale would be the first order of business when it returned. Norfolk Southern extended its offer through March.
The biggest question seems to be whether Norfolk Southern's acquisition of one of the other two major Eastern railroads would be anticompetitive. Norfolk Southern and the Transportation Department argue that the divestitures have resolved those questions to the satisfaction of the Justice Department. Justice is studying the issue, although it has blessed the merger in principle.
Sens. Howard Metzenbaum (D-0hio) and Arlen Specter (R-Pa.), among others, have promised the filibuster. Metzenbaum is from the headquarters state of the Chessie System, a CSX railroad. CSX has vigorously opposed the Norfolk Southern acquisition. Specter is from Pennsylvania, headquarters of Conrail.
Metzenbaum said yesterday that, because of the new Morgan Stanley offer, "Dole should pull the Conrail sales bill off the calendar. This new bid by Morgan Stanley proves that the proposed $1.2 billion bid by Norfolk Southern is grossly inadequate."
There is a third bidder: Allen & Company Inc. and First Boston Corp. are offering $1.65 billion. But their proposal, made in December, does not include many of the public protection covenants Transportation Secretary Elizabeth Hanford Dole has insisted must be part of any deal and appears to have generated little enthusiasm.
Morgan Stanley's new bid comes the same week that Conrail announced it expects to report record profits for 1985. It also comes the same week that a coalition of shippers and public policy advocates announced the formation of a new group, the Coalition of Americans for Privatization, which was organized to support the Norfolk Southern purchase.
The coalition held a news conference the other morning at which its chairman, John M. Albertine, told enthralled reporters: "The federal government should no more be running a railroad than a bordello." That is somewhat catchier than Secretary Dole's oft-repeated statement: "It is time to return Conrail to the private sector, where it belongs."
Finally, Conrail and the Transportation Department are sparring over the meaning of Conrail's reported $64 million in positive cash flow for 1985. Burnley said that because of negative cash flow in the prior 11 months, "All we can figure is that Conrail Chairman L. Stanley Crane didn't pay any bills in December."
Conrail spokesman Saul Resnick responded: "Our public accountants review our financial statements. . . There is no need to comment any further on what Mr. Burnley said."