Goldman Sachs Leads Historic Conrail IPO, Largest Ever Public Offering

Theme: Clients

Goldman Sachs leads the Conrail IPO in 1987, the largest ever public offering and an important chapter in the history of American railroads.

In 1987, Goldman Sachs led the IPO of Consolidated Rail Corporation, commonly known as Conrail. The US$1.6 billion public offering was one of the largest ever and a significant chapter in the history of the American railroad industry itself.

By the late 1960s and early 1970s, railroads in the Northeastern and Midwestern United States were struggling to survive. Reduced passenger and freight traffic, escalating costs, regulation and competition from air and truck transport were some of the factors that led to the bankruptcy of several northeastern railroads by 1972. The most noteworthy of these was the Penn Central bankruptcy of 1970. The largest bankruptcy in history, it roiled the commercial paper market and even threatened the very survival of Goldman Sachs.

On the heels of those bankruptcies, President Richard Nixon signed into law the Regional Rail Reorganization Act (the 3R Act) in 1974. This provided temporary funding to keep the railroads operating in anticipation of a more permanent plan for their survival. Congress approved Conrail’s operation plan as part of the Railroad Revitalization and Regulatory Reform Act of 1976. In April 1976, Conrail began operations. With 17,000 miles in lines in 15 states in the Northeast and Midwest, Conrail was the second largest railroad in the United States. Conrail was comprised of six bankrupt railroads, with the government owning 85% and employees owning the balance.

Initially, Conrail continued to operate with massive losses, despite billions of dollars in improvements and assistance from the federal government. After additional intervention by the U.S. Congress passing legislative reforms plus new corporate leadership, Conrail turned profitable by 1981. Looking to return the railroads to private ownership, the U.S. government weighed selling Conrail to a variety of bidders – including other railroads. Ultimately, the government would decide to sell its interest in Conrail via what would become the largest IPO in U.S. history.

Long before the IPO, Goldman Sachs recognized the opportunity and challenges presented by the U.S. government’s operation of and final disposition of Conrail. By 1982, the firm was serving as an investment advisor to the U.S. Transportation Department regarding Conrail. After the passing of the Conrail Privatization Act in October 1986, Goldman Sachs was selected to co-lead manage the historic public offering.

On March 26, 1987, Conrail went public, priced at US$28 per share. The U.S. government’s 85% stake in the company sold for US$1.65 billion. The offering was the largest initial public offering to date. With the addition of Conrail’s cash reserves, the government received US$1.875 billion from the IPO, funds that were used to reduce the federal deficit.

Among the ironies of the deal was the fact that Penn Central, the railroad that had brought the firm to the brink of disaster with its own bankruptcy, was part of the Conrail entity that now represented one of the firm’s crowning achievements. In addition, two of the rejected bidders for Conrail before it went public, Norfolk Southern and CSX, eventually acquired Conrail through a joint stock purchase in 1997 for US$10.5 billion.