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    ConrailM&a Group7

    Uploaded by

    Saquib Hasnain
    The document summarizes a proposed merger between Consolidated Rail Corporation (Conrail) and either CSX Corporation or Norfolk Southern Corporation. It provides background on the railroad industry and the involved companies. It then details the bidding war that ensued between CSX and Norfolk Southern to acquire Conrail, with each increasing their offers over time. The document analyzes the deal structures, potential cost savings and market dominance from the mergers. It also evaluates the mergers using financial metrics like EV/Sales, EV/EBITDA, P/E, P/BV multiples and discounted cash flow valuation to determine appropriate purchase prices.

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    ConrailM&a Group7

    Uploaded by

    Saquib Hasnain
    573 views15 pages
    The document summarizes a proposed merger between Consolidated Rail Corporation (Conrail) and either CSX Corporation or Norfolk Southern Corporation. It provides background on the railroad industry and the involved companies. It then details the bidding war that ensued between CSX and Norfolk Southern to acquire Conrail, with each increasing their offers over time. The document analyzes the deal structures, potential cost savings and market dominance from the mergers. It also evaluates the mergers using financial metrics like EV/Sales, EV/EBITDA, P/E, P/BV multiples and discounted cash flow valuation to determine appropriate purchase prices.

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    The document summarizes a proposed merger between Consolidated Rail Corporation (Conrail) and either CSX Corporation or Norfolk Southern Corporation. It provides background on the railroad industry and the involved companies. It then details the bidding war that ensued between CSX and Norfolk Southern to acquire Conrail, with each increasing their offers over time. The document analyzes the deal structures, potential cost savings and market dominance from the mergers. It also evaluates the mergers using financial metrics like EV/Sales, EV/EBITDA, P/E, P/BV multiples and discounted cash flow valuation to determine appropriate purchase prices.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    573 views15 pages

    ConrailM&a Group7

    Uploaded by

    Saquib Hasnain
    The document summarizes a proposed merger between Consolidated Rail Corporation (Conrail) and either CSX Corporation or Norfolk Southern Corporation. It provides background on the railroad industry and the involved companies. It then details the bidding war that ensued between CSX and Norfolk Southern to acquire Conrail, with each increasing their offers over time. The document analyzes the deal structures, potential cost savings and market dominance from the mergers. It also evaluates the mergers using financial metrics like EV/Sales, EV/EBITDA, P/E, P/BV multiples and discounted cash flow valuation to determine appropriate purchase prices.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 15

    CONSOLIDATED RAIL CORPORATION

    MERGERS & ACQUISITIONS

    Akhil Gairola 3B
    Ankit Joshi 9B

    GROUP 7

    Bharat Jain 15B


    Geetansh Sawhney 17B
    Nitin Puri

    29B

    Vivek Mour 55B

    Agenda
    Industry Overview Railroads
    The Big Players
    Events leading to Acquisition
    Events with DataStream
    Deal Structure
    Competitive Impact of Proposed Merger
    Blended Price Offer
    Poison Pill Calculations
    Valuation Calculations

    Industry Overview - Railroads


    Explosive growth in mid 1800s Dramatic Consolidation in 1870s to reduce costs
    Trucking emerged as a powerful competitor in 1940s
    Regulatory impediments & inflation leading to declining profitability in 1970s
    6 largest Northeastern railroads filed for bankruptcy by 1972
    Staggers Rail act 1980 Deregulation Allowing Pricing Competitively, Abandon
    Unprofitable lines, & pursue M&A Consolidation reduced Class I railroads from 40 to 9 in
    15 years
    1/3rd of route miles shut Labor Productivity increased Industry profitability increased
    Operating Ratio decreased from 93.3% (1980) to 80% (1995)
    Consolidation in 1990s Burlington Northern acquired Santa Fe Pacific @ USD 4 bn
    expecting USD560 mn Synergy gains Union Pacific acquired Southern Pacific @ USD
    5.4bn Most deals in west railroads
    Minimum Interference by STB(Regulator) in approving the deals
    NAFTA Opportunity but lacking east-west connections

    The Big Players (1/2)


    Consolidated Rail Corporation
    Created out of remains of the 6 Bankrupt railroads in 1973 in Loss till 1980
    Reduced headcount & Unprofitable routes to earn $500 mn profit in 1984
    IPO in 1987 biggest IPO in US history at that time
    Near monopoly in lucrative Northeast Rail market but least efficient railroad in the East
    1995 23510 Employees, 10701 miles of track & 29.4% of eastern rail freight market
    CSX Corporation
    Diversified company Inter modal service, ocean-container shipping, railroad etc.
    Railroad subsidiary was a result of merger of 3 railroads
    1995 29537 Employees, 18645 miles of track & 38.5% of Eastern rail freight market

    The Big Players (2/2)


    Norfolk Southern Corporation
    Railroading main business, Owned North American Van Lines & Pocahontas
    Land Corporation (a natural resource company)
    1995 24488 Railroad Employees, 14415 miles of track, 32.1% of Eastern rail
    freight market
    Like CSX, its routes connected 20 southeastern and Midwestern states & the
    canadian province of Ontario
    Leader in Technological Innovation, Most efficient & best managed Rail road in
    the US
    Even before the IPO of Conrail, both CSX and Norfolk tried to acquire Conrail

    Events leading to Acquisition


    October 15,1996 - $8.3 bn Merger between CSX and Conrail Announced
    October 23,1996 Norfolk Southern countered CSXs bid with hostile $9.1 bn offer for
    Conrail
    CSX dismissed Norfolks bid as a non-bid on technical grounds - Norfolks Southern sued
    to stop the deal on legal grounds
    November 6,1996 - CSX amended its tender offer front end cash offer $110 per share,
    extended No Talk period by 3 months postponed the conrail shareholder opt out vote
    November 8,1996 Norfolk Southern increases cash offer
    December 19,1996 CSX increases back-end offer, Norfolk Southern increases cash
    offer
    January 13,1997 Norfolk Southern offers to buy 9.9% of Conrail after shareholder vote
    January 17,1997 Critical Vote for Conrail Shareholders on whether to permit CSXConrail Merger

    Deal Structure
    CSX offered to acquire Conrail in a 2-tier deal
    Front End Offer Buy 40% of Conrails acquisition shares
    Back End Offer For the remaining 60% shares, exchange ratio 1.85619:1

    Front end offer was executed in two stages :


    Cash Tender Offer for 17.86 million shares(19.7% of acquisition shares) @ $92.5 per share
    Cash Tender Offer for 20.3% of acquisition shares at same price executed only after Conrail
    shareholders approved the deal

    Back end offer was to be executed only when both shareholders and STB approved
    the merger after second cash tender offer
    Based on CSXs stock price of $46.75, the offer had a blended value of $89.07 per
    share
    Other Provisions:
    Break-up fee : Obligated Conrail to pay CSX $300 mn if the transaction did not take place
    Poison Pill: Conrail has to suspend its poison pill each Conrail shareholder had the right to purchase
    an additional share at 50% discount to current market price for each share owned if outsider
    purchases 10% or more of Conrail
    No Talk Clause: Forbidding Conrail from pursuing Merger discussions for a period of 6 months

    Events with DataStream


    Norfolk
    Souther n
    Bid in Cash
    ($ per
    share)

    CSX Bid ( $ per share)


    Date
    Front End Offer Back End Offer
    Blended Value
    15 Oct-96

    92.5

    86.77

    89.07

    23 Oct-96
    6 Nov-96

    6 months
    100

    110

    80.06

    92.04

    8 Nov-96
    19 Dec-96

    Length of
    No-Talk
    Clause

    9 months
    110

    110

    97.21

    16
    Jan-97
    110
    99.53 Law
    Pennsylvania
    Business
    Corporation

    100.41

    115

    102.16

    115

    Fair Value statute: bids >20% all get same price


    Bidders voting rights maxed at 20% unless management approves
    Constituency statute: protect unions

    24 months

    Competitive Impact of Proposed Merger


    Projected gains in operating income of $565 mn per year from cost
    reductions
    Projected gains in operating income of $165 mn per year from Revenue
    enhancement by the year 2000
    The merger would create an entity with more than $8.5 bn in revenue and
    almost 70% of the eastern market
    Projections of Cost savings for CSX were higher than Norfolk Southern,
    despite being less efficient, because of overlapping operations & lower
    costs on longer contiguous routes
    The acquisition was a strategic decision for both CSX & Norfolk Southern as
    for the winner it would result in dominance of the eastern & mid-western
    rail freight market while for the loser it would create new challenges

    Blended Price Offer


    Blended Offer Price
    Total No of Shares ('000)
    Price for 40% share
    40% Consideration (amount in $ '000)
    Exchange Ratio
    New Share to be issued ('000)
    Price per share
    Value of exchange consideration
    (amount in $ '000)
    Total Value of Consideration ($ 000)
    Value per share ($)

    90500
    92.5
    3348500
    1.85619:1
    100791
    46.75

    4711985
    8060485
    89.07

    2-tier Offer from CSX


    To Conrail

    Poison Pill Calculations


    Cost of Poison Pill

    Existing number of shares o/s

    81450

    New Shares subscribed under PP

    81450

    CMP

    $71.0

    Discounted Price @ 50%

    $35.5

    Net Proceeds

    $2,891,475.0

    New Market Cap

    $9,316,975.0

    New no of Shares

    171950

    New Market Price per share

    $54.2

    loss in Per share value

    $16.8

    Share of Friendly sahre holders

    94.7%

    Share of Hostile Share holders

    5.3%

    Poison Pill Calculations


    A strategy to allow
    your shareholders to
    get a new share @50%
    discount when an
    outsider purchases
    10% or more of Conrail

    Valuation Calculations Transaction Multiples


    Target

    Acquiror
    Burlington
    Santa Fe Pacific
    Northern
    Kansas City Southern Illinios Central
    Santa Fe Pacific
    Union Pacific
    Chicago and North
    Western
    Union Pacific
    Southern Pacific
    Union Pacific
    Median

    Target
    Santa Fe Pacific

    Acquiror
    Burlington
    Northern

    EV/Sales
    2.6x
    3.6x
    1.8x

    3722

    Conrail's EV according to EV/Sales multiple

    8932.8

    Debt

    2094

    Market Cap

    6838.8

    No of Shares

    90.5

    2.4x
    1.7x

    Conrail's price according to this multiple

    75.57

    2.4x

    Conrail's Current Price

    71.00

    EV/EBITDA
    13.1x

    Kansas City Southern Illinios Central

    9.9x

    Santa Fe Pacific

    9.2x

    Union Pacific

    Conrail's Sales

    Chicago and North


    Western

    Union Pacific

    8.5x

    Southern Pacific

    Union Pacific

    12.2x
    10.6x

    Premium Paid

    Conrail's EBITDA
    Conrail's EV according to EV/EBITDA
    multiple
    Debt
    Market Cap
    No of Shares

    4.6%

    1017
    10759.86
    2094
    8665.86
    90.5

    $
    Conrail's price according to this multiple 95.76
    $
    Conrail's Current Price
    71.00
    Premium Paid
    24.8%

    Valuation Calculations Transaction Multiples


    Target
    Santa Fe Pacific
    Kansas City Southern
    Santa Fe Pacific
    Chicago and North
    Western
    Southern Pacific

    Acquiror
    Burlington
    Northern
    Illinios Central
    Union Pacific

    P/E
    21.4x
    14.6x
    13.4x

    Union Pacific
    Union Pacific

    Median
    Target

    Conrail's EPS

    Conrail's Price according to P/E


    $ 104.13
    multiple

    18.3x
    18.4x

    Conrail's Current Price

    18.3x

    Premium paid

    Santa Fe Pacific

    Acquiror
    Burlington
    Northern

    Kansas City Southern

    Illinios Central

    1.7x

    Santa Fe Pacific

    Union Pacific

    2.8x

    Conrail's Price according to P/BV


    multiple

    Chicago and North


    Western

    Union Pacific

    5.5x

    Conrail's Current Price

    Southern Pacific

    Union Pacific

    3.7x

    Median

    P/BV

    $ 5.69

    $71.00
    46.7%

    Conrail's Book Value

    $ 32.46
    $ 120.10
    $ 71.00

    4.5x

    3.7x

    Premium Paid

    49.1%

    Valuation Calculations DCF Valuation


    NPV

    2166.9

    Shares

    90.5

    NPV per share

    $ 23.94

    Pre-merger
    Total

    $71.00
    $94.94

    CSX Valuation - 1

    NPV
    Shares
    NPV per share

    -744.7
    90.5
    $
    (8.23)

    Pre-merger

    $71.00

    Gain

    $31.75

    Opp cost

    $(8.23)

    Total

    $94.52

    CSX Valuation - 2

    NPV
    Shares
    NPV per
    share

    -1380.5
    90.5

    Pre-merger

    $71.00

    Gain

    $31.89

    Opp cost

    $(15.25)

    Total

    $(15.25)

    $87.63

    Norfolk Southern
    Valuation

    THANK YOU !

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