CSX-Conrail Case

Submitted By: Group 13

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

Case Introduction
Conrail

CSX

Formation in 1973 and first profit in

1981
Privatized through IPO in 1987
Controlled 29.2% 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 38.5% of the Eastern rail

freight market

CSX-Conrail Deal
Result into more than $8.5 billion of revenues and nearly

70% of the Eastern market

CSX offered a two- tiered deal with payment of $92.50 in
cash for the first 40% of Conrail acquisition shares and
would exchange shares in the ratio of 1.85619:1(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

Offer Price
It is a two-tiered deal worth $8.3 billion at announcement.
Initial Offer
Front end cash
offer
Back end stock
swap
Final value of
offer

Price of
share

Proportion of
shares

92.5

40%

86.78

60%

89.07

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 $ 7.8 billion and 61% of Eastern
market

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, compelling the bidder to negotiate
with the target's Board of Directors.
Generally, a poison pill issues rights to all existing
shareholders, with the exception of the hostile suitor, 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, 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 $0.05 per right) at the option of the

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

$
95.63
90,500,000
50%
$400
$200
10%
$
8,654,515,000
$16,290,000,00
0

$24,944,515,00
0

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
21.4
14.6
13.4
18.3
18.4

Book Value
4.5
1.7
2.8
5.5
3.7

Sales
2.6
3.6
1.8
2.4
1.7

EBITDA
13.1
9.9
9.2
8.5
12.2

Median

18.3

3.7

2.4

9.9

Final
Valuation

.
4*Sales+.4*P/E
+.2*BV multiple

$9710mn

Conrail Stats
EPS

4.91

EBITDA

477.3333

EV
Debt

1876

Cash

33

BV

2938

Sales

3694.667

Valuation(in $mn), based on

projected earnings of FY 1996-97

DCF Valuation
Fundamental value of target : $ 8339.71 mn
Net Synergy PV taxable: $ 5981.66
Share price for the fundamental value : $ 70.32/share
Maximum share price with synergies included: $ 136.41/share
WACC calculated as 9.47% with Rate of Equity as 10.51%
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 .4% of revenues
Revenue projected at 2.65% CAGR based on historical values
Risk free rate : 6.8%
Cost of debt taken as Corporate Bonds of rating Baa: 8.11%

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