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CSX-Conrail Case

Submitted By: Group 13
Akshay Ahuja 5A
Ashutosh Agarwal 13A
Ayush Saraf 15A
Gautam Guliani 17A
Samarth Nagpal 40A

5% of the Eastern rail freight market .2% of the Eastern Railroad but was highly inefficient  Was constantly troubled by the trucking industry  Virginia based transportation company with intermodal services and railroad services  Major player in the Southeastern and Midwestern States and Canadian province of Ontario  Controlled 38.Case Introduction Conrail CSX  Formation in 1973 and first profit in 1981  Privatized through IPO in 1987  Controlled 29.

5 billion of revenues and nearly 70% of the Eastern market CSX offered a two.50 in cash for the first 40% of Conrail acquisition shares and would exchange shares in the ratio of 1.CSX-Conrail Deal Result into more than $8.tiered deal with payment of $92.85619:1(CSXConrail) for the remaining 60% Better economies of scale with market from the Norfolk Southern going to the merged entity The merger would lead to better operating margins Railroad market is a mature market so to grow acquisitions is the only mode CSX-Conrail would lead to increase in revenues Cost synergies of $300 million Additional operating income of $180 million .

07 .5 40% 86. Initial Offer Front end cash offer Back end stock swap Final value of offer Price of share Proportion of shares 92.3 billion at announcement.Offer Price It is a two-tiered deal worth $8.78 60% 89.

8 billion and 61% of Eastern market .Pre-Empt Bid by Norfolk Southern Norfolk Southern is the most efficient and best- managed railroad company in the United States It has access in the Southeastern and Midwestern States and the Canadian Province of Ontario It controlled 32.1% of the Eastern rail freight market Financially Norfolk is healthier than CSX Is widely regarded as the most efficient and well managed railroad in the United States A Norfolk Southern Conrail combination would have revenues of $ 7.

Anti-takeover Mechanisms Conrail had a poison pill mechanism in place which could be triggered if a hostile bidder acquired more than 10% shares A poison pill (rights plan) is a security that gives holders the rights to purchase stock at a discount in the form of common stock dividends It can be adopted without shareholder approval and its an exclusive mechanisms useable by the board of directors The poison pill provision imposes losses on the acquirer and dilutes his/her equity provision In the Conrail case the discount factor was 50% of the current market price .

How Poison Pill Functions • A poison pill is designed to make the transaction being pursued by a hostile bidder extremely unattractive from an economic perspective. to acquire stock of the target (or of the aggressor upon a subsequent merger) at prices significantly below market • Sequence of steps  Adoption of the plan only requires a vote of Board of Directors  Once approved. compelling the bidder to negotiate with the target's Board of Directors.05 per right) at the option of the . with the exception of the hostile suitor. a poison pill issues rights to all existing shareholders. each right entitles the holder to purchase common or participating preferred stock of the company at a predetermined exercise price  Rights are redeemable at a nominal price (usually between $0.01 and $0. • Generally.

00 0 .944.Poison Pill Calculation Taking the exercise price as 4x of the current market value of the share price Stock price of target before pill is triggered Number of shares outstanding before attempted raid: Discount at which non-raider shareholders have the right to purchase shares: Purchase shares worth By paying Poison pill "trigger": Market value of equity before trigger Cash received upon exercise of poison pill rights Market value of equity after trigger Number of shares held by the raider when the pill is $ 95.290.000.654.515.000 $16.000 50% $400 $200 10% $ 8.63 90.515.500.00 0 $24.

1 9.8 5.8 2.3 18.7 Sales 2.667 Valuation(in $mn).6 1.5 12.4 14.2 Median 18. based on projected earnings of FY 1996-97 .4 1.91 EBITDA 477.6 3.7 EBITDA 13.2 8.Valuation using Transaction Multiples Deal Offer Price per EV as a multiple of Santa Fe Burlington Kansas City Illinois Santa Fe Union Pacific Chicago Union Pacific Southern Union Pacific EPS 21.5 3.3333 EV Debt 1876 Cash 33 BV 2938 Sales 3694.4*P/E +.6 13.5 1.7 2.9 Final Valuation .2*BV multiple $9710mn Conrail Stats EPS 4.7 2.9 9.4 Book Value 4. 4*Sales+.4 9.3 3.4 18.

DCF Valuation Fundamental value of target : $ 8339.66 Share price for the fundamental value : $ 70.47% with Rate of Equity as 10.4% of revenues Revenue projected at 2.51% Assumptions • • • • • • Capex taken as 2% of revenues Assets have a useful life of 25 years with no salvage value Change in working capital is taken as .41/share WACC calculated as 9.8% Cost of debt taken as Corporate Bonds of rating Baa: 8.71 mn Net Synergy PV taxable: $ 5981.65% CAGR based on historical values Risk free rate : 6.11% Microsoft Excel Worksheet .32/share Maximum share price with synergies included: $ 136.