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 !