CNW accepts $1.6 billion merger deal

By JACK LESAR, UPI Business Writer

CHICAGO -- CNW Corp., target of an unsolicited $721 million tender offer by Japonica Partners, Tuesday announced acceptance of a competing, $1.6 billion merger offer by a group that includes senior CNW management and Union Pacific Corp.

The $50 a share proposal was chosen by the railroad company as the best of three competing bids -- including a hostile $44-a-share offer by Japonica and a proposal by CNW employees.


A definitive merger agreement unanimously approved by CNW directors calls for acquisition of CNW for $45.50 a share in cash and $4.50 a share, face value, of preferred stock with a dividend rate of 17 percent.

In addition to the acquisition of some 19 million shares oustanding, the deal calls for assumption of certain existing debt and other obligations, bringing the total price tag to about $1.6 billion.

Japonica, in response to the CNW announcement, terminated its $44-a-share tender offer and said it was evaluating its alternatives, including tendering its CNW stock under the offer to be made pursuant to the merger agreement.


Japonica said no stock was tendered under its offer.

Under the deal announced Tuesday, CNW will be acquired by a corporation headed by Blackstone Capital Partners L.P. and including other investors, among them CNW senior management, Donaldson, Lufkin & Jenrette Securities Corp. and Union Pacific.

'This transaction represents an important positive step for all the major constituencies of CNW,' said CNW Chairman Robert Schmiege, who heads the senior CNW management group participating in the acquisition.

'Employees and customers of CNW will benefit from the fact that our business plan calls for upgrading CNW's most strategically important line, does not depend upon the sale of operating assets, and continues CNW's role as a provider of quality transportation services,' Schmiege said.

CNW Corp. is the parent of Chicago and North Western Transportation Co., which operates commuter rail service in the Chicago area and freight service in the Midwest and Plains, serving Illinois, Wisconsin, Michigan, Iowa, Minnesota, Nebraska, South Dakota, Missouri, Kansas and Wyoming.

Japonica, an investment group headed by former New York investment banker Paul Kazarian, made a $721 million, $44-a share merger proposal in April, offering $39.50 in cash and $4.50 in preferred stock per common share of CNW stock.

To press its bid, Japonica waged a proxy battle, running its own slate of directors against the incumbent CNW board at CNW's May 16 stockholders meeting, but the Japonica slate was roundly defeated.


CNW subsequently set a June 2 deadline for competing offers while Japonica pursued a tender offer.

Offers from Japonica and CNW employees were considered along with the Blackstone group bid. The Blackstone offer was unanimously recommended by a special committee of outside directors appointed to preside over the auction and won unanimous approval of the CNW board.

CNW directors, customers and several members of Congress had expressed concern that the Japonica proposal would leave CNW too encumbered by debt to continue operation.

CNW officials and officials of the Blackstone group said their merger agreement provides a conservative capital structure that will ensure adequate liquidity and provide for substantial capital improvements.

In an agreement with the Union Pacific, CNW will commit to spend $115 million through 1992 -- including $40 million in the second half of this year -- to maintain and upgrade CNW's east-west main line.

A total of $230 million of equity capital will be invested in the newly formed company, in addition to the approximately $84 million of new preferred equity to be issued to existing stockholders.

Blackstone will hold the controlling interest, with minority common stock positions held by CNW management and by Donaldson, Lufkin & Jenrette.


The Union Pacific will hold $100 million of pay-in-kind preferred stock, convertible into a 25 percent minority position in common stock after five years, subject to approval by the Interstate Commerce Commission.

Blackstone has received committments for all the financing, with Chemial Bank providing a commitment for up to $585 million of senior bank debt, including a $75 million standby liquidity facility.

Donaldson, Lufkin & Jenrette will provide up to $475 million in bridge financing, expected to be refinanced by subordinated debt underwritten by DLJ.

'Blackstone, DLJ and management are strongly committed to the railroad's continuing growth and success,' said Blackstone President Stephen A. Schwarzman.

Blackstone is a majority owner of Transtar Inc., which operates seven railroads in the Midwest and Pennsylvania.

Transtar and CNW do not compete directly and will be run as separate entities.

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