Rail unions step up to buy giant Conrail
The unionized employees of Conrail, the Consolidated Railway Corporation, have proposed to buy the giant railroad from the US government.
In a letter to Drew Lewis, the secretary of transportation, the Railway Labor Executives' Association, an umbrella organization representing 20 unions, has informed Mr. Lewis that the union members voted ''overwhelmingly'' in favor of pursuing a proposal to acquire either complete or substantial ownership of the once-bankrupt line. The unions hope that by buying the railroad, which was part of the Penn Central Corporation before it went bankrupt, they will be able to save jobs. Conrail is largely a freight carrier.
John Fowler, general counsel of the Department of Transportation, said in an interview, ''We are not antagonistic to organized labor participating in this, but we aren't sure in what form and how it should be done.'' Mr. Fowler indicated that the department's top priority with regard to Conrail at this point is to distribute the commuter operations to local operating authorities by Jan. 1.
Should the proposal ultimately become reality, it would be the largest purchase of a company in the United States by its employees.
Other unions, faced with closing plants, are likewise considering purchases. For example, those representing 10,000 employees of National Steel are discussing the purchase of National's Weirton, W.Va., steel division. But the Weirton division is much smaller than Conrail. Weirton has assets with a book value of about $322 million, compared with Conrail's $4 billion to $5 billion.
Neither union organization has lined up financing yet. This is considered a major hurdle.
Before any Conrail deal is consummated, there is sure to be a lot of legal, financial, and political scurrying, since the railroad has some attractive assets. For example, some of its lines would fit nicely with other railroads' expansion plans. Outside observers mention the Union Pacific and the Santa Fe, for example, as roads that could establish a transcontinental line with the acquisition of Conrail. Still other corporations might view Conrail's $1.7 billion in past net operating losses (which can be carried forward to offset profits for tax purposes), its large investment tax credits, and its future depreciation potential as making it a plum worth picking.
The government, under the terms of the Northeast Rail Service Act of 1981, must sell Conrail either piecemeal or as an entity by June 1, 1984.
Goldman, Sachs & Co., an investment banking firm, has been hired by the government to assist it in evaluating proposals to buy the railroad. The unions have hired Brian M. Freeman, a lawyer, who formerly worked for the Treasury Department as the executive director and administrator of the loan guarantees made to Chrysler Corporation.
Although the unions, in their letter to Secretary Lewis, said it was premature to make a formal offer with an purchase price, they set down some concepts they want considered. These include asking the government to:
* Set the sales price based on the earnings-revenues stream.
* Accept a deferred payment for part of Conrail - allowing the unions to give the government an IOU as part of the purchase price.
* Agree to keep Conrail's assets in one sales package.
* Deny any purchaser the right to use the railroad's tax attributes. The union says it will surrender those attributes and suggest the government ask for bids with and without the tax attributes.
In an attachment to the letter, the association also said it would use the subject of wage concessions as part of the bargaining process. Future wage concessions, if the employees are not successful as buyers, would have to be negotiated - possibly for an equity position. The union also asked that they get credit for their wage concessions, which have amounted to about $200 million a year for the past two years, and for their 15 percent ownership of Conrail through their employee stock ownership plan.
So far, the union leaders have held meetings with L. Stanley Crane, the current chairman of Conrail; his senior staff and board of directors; Goldman, Sachs and other investment bankers; and the Department of Transportation. Conrail said it had no comment at this time on the union letter.
Mr. Fowler, the Transportation Department's general counsel, said he saw no reason to hurry into making decisions on the Conrail sale at this point. After Jan. 1, he said, ''We will go to the private markets to see who is interested in buying Conrail.'' He also said his department would not react to the purchase letter ''in any manner to eliminate any option open to us.''
One of his main concerns about the union position, he said, was the union's desire to receive credit for past wage concessions as well as for other contributions it has made.
''We will not sell the whole thing for nothing,'' he indicated, ''because we think this company has real value to the United States.''
He also indicated the government hoped to sell Conrail independently of its tax attributes. ''If a company wants them, they will pay for them,'' he stated.
He also said the government would not set a sales price, as the union had asked it to do, but would wait for concrete offers. He pointed out the government has spent $3.5 billion on Conrail's physical plant so far, and hopes to get something back on its investment. Altogether, the government has spent about $5 billion to $6 billion on saving Conrail.
Although Fowler said it was too early to respond to all of the union's ideas, he said, ''There is no way anyone will buy the company without an agreement from labor.''
Originally, Goldman, Sachs was considering selling shares of Conrail to the public in an initial public offering. But as Fowler pointed out, there are problems with that approach, since it would have to be done on a ''best efforts'' basis. In other words, Goldman, Sachs would sell as many shares as possible to the public. The government could get 10 cents or $10 billion.
Before any sale, Conrail must also continue to show it can be run profitably. Under terms of the 1981 legislation, it must demonstrate this by June 1. If it passes this initial test, it has till next Oct. 31 to show it can produce income based on reasonable maintenance and is able to borrow money without government guarantees. Once it passes these tests, it can be sold as an entity. If no buyer can be found who satisfies the government, it can be sold piecemeal.
In its latest statement, Conrail reported a decline of 8.6 percent in profit during the third quarter. Freight traffic fell 25 percent.
If Conrail's employees bought it, it would be the first takeover by railroad employees in a decade - since workers purchased the Chicago & Northwestern Railway. Richard Fisher, a Merrill Lynch & Co. analyst, notes the Chicago railroad is now profitable.