Wednesday, October 25, 2000

Lindner awaits Amtrak payday

Value of railroad stock in dispute

By Cliff Peale
The Cincinnati Enquirer

        A fight is brewing between the government-owned passenger railroad system Amtrak and the main owner of its common stock, Cincinnati's Carl Lindner Jr.

        Amtrak officials tendered an offer of 3 cents for each of Amtrak's 9.4 million common shares Oct. 12. That would mean about $157,000 for Mr. Lindner's American Financial Group Inc., which owns 5.24 million of those shares.

        American Financial's shares are a leftover from its 1980s acquisition of Penn Central Corp. The shares do not hold any control over Amtrak's operations, and they have no market value now because the federal government owns Amtrak's preferred stock and controls its operations.

        • Officially called the National Railroad Passenger Corp., it began service from New York to Philadelphia in May 1971.
    • The railroad system serves more than 500 stations in 45 states.
    • Only one route, the Cardinal, serves Cincinnati, with one train three days a week.
    • Amtrak operates more than 22,000 route miles and owns 730 of those.
    • On weekdays, Amtrak operates up to 265 trains a day.
    • Last year, it carried about 22.5 million riders.
    • Its busiest station is Penn Station in New York City, with 7.7 million customers last year.
    • Amtrak employs more than 25,000 workers.
    • Amtrak received $521 million from Congress in its fiscal 2000 budget.
    • The U.S. Department of Transportation owns all of Amtrak's preferred stock, the only voting stock in the company.

        But Mr. Lindner could ask for millions of dollars for the common shares, setting up negotiations that could last years.

        A 1997 restructuring ordered by Congress gives Amtrak until Oct. 1, 2002, to redeem all of the common shares at “fair market value.”

        At stake for Amtrak — and, ultimately, U.S. taxpayers — is a potential multimillion-dollar payment to Mr. Lindner for something that has no trading value, for ownership in a company that the federal government supports to the tune of half a billion dollars a year.

        At stake for Mr. Lindner is a significant payday after years of holding the Amtrak investment. The Cincinnati Reds owner and insurance magnate has a reputation for taking virtually worthless investments and patiently waiting for them to pay off.

        While AFG officials would not comment on the Amtrak investment, they privately are criticizing the proposed tender offer as ludicrously low for holdings in a railroad system stretching across the country.

        “In our view, it's not worth anything,” Amtrak general counsel James Lloyd said, pointing out that there's no market for the shares. “We've had some discussions with the common stockholders, but those discussions haven't led to anything.”

        Because he has held the shares for years, Mr. Lindner has little incentive to settle quickly and probably will fight for a significantly larger valuation for Amtrak's assets.

        “The (1997) act is silent” on what happens if the two sides do not agree on a price, Mr. Lloyd said.

        Asked whether he expected American Financial to agree to the 3-cents-a-share tender offer, Mr. Lloyd said, “I don't know. We haven't heard back yet.”

        Most parties agree on one point: Three decades after it was formed, Amtrak is nowhere near self-sufficiency, but its rights of way, equipment and other holdings clearly have value. According to a new report from the General Accounting Office, the investigative arm of Congress, the railroad needs to cut $287 million in additional costs to support itself. For the first nine months of this fiscal year, its net loss was $711 million, the report said.

        Not one of Amtrak's routes makes money.

        In addition, Amtrak will need at least $9 billion in new capital in the next 15 years, the GAO report said.

        “Amtrak has made relatively little progress over the past five years, and the results for the first nine months of the current fiscal year in reducing its budget are not encouraging,” the GAO report said.

        “This means that substantial additional progress will be required over the next two years to attain operations self-sufficiency.”

        Since it was founded in 1971, Amtrak has received more than $23 billion in government support.

        The railroad — officially called the National Railroad Passenger Corp. — is trying several things to raise revenue. It hopes to earn enough on express freight to cover losses from passenger service.

        And Amtrak officials are counting on the new Acela Express high-speed train in the Northeast to bring in new riders and new revenue.

        The train, which rides at 150 miles an hour, will launch service Nov. 16, eventually traveling from Washington, D.C., to Boston.

        American Financial acquired its Amtrak common shares along with assets of the old Penn Central railroad. It eventually renamed the former railroad American Premier Underwriters Inc. and transformed it into an insurance company.

        Many of those assets were spun off into separate companies or sold, including what now is wire maker General Cable Corp. pipeline unit Buckeye Management Co., and Sprague Technologies Inc., a maker of electronic components.

        The acquisition also bought significant real-estate holdings in New York, most prominently Grand Central Station in Manhattan.

        Penn Central was one of four railroads that had taken advantage of a chance to acquire Amtrak common stock in exchange for cash, equipment or services.

        As the sole holder of Amtrak's preferred stock, the Transportation Department gets a preferred position over common stock holders if Amtrak liquidates.

        The government's ownership is written into the laws that created Amtrak. The total value of the preferred stock is estimated at about $10 billion, according to the Congressional Research Service. The CRS did not value the common shares.

        Other holders of the common stock include Burlington Northern Railroad, Canadian Pacific Railroad and Canadian National Railroad.


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