Consolidated Rail Assignment_writeup
3
Why did NS make a hostile bid for Conrail? NS made a hostile bid for Conrail for 3 primary reasons a) a merger of CSX-Conrail posed a serious risk to NS in terms of over $1B dollars lost in opportunity costs b) Conrail was considered a scarce jewel as they controlled greater than 29.2% of the rail freight market east of the Missippi c) Conrail's revenue per mile of track operated, per carload originated and per ton originated were the highest in the industry but the least profitable. Elimination of redundant costs would create synergies for NS and create additional value that Conrail cannot realize as an independent company. In a bidding war, who should be wiling to pay more, NS or CSX ? Please provide numbers (valuation analysis) to support your view Based on the stand-alone value of Conrail and the present value of future synergies, NS should be willing to pay more for Conrail than CSX should. H owever in head to head competition NS will not be able to pay as much as CSX without diminishing the value of the stock. NS stands to lose more if the CSX-Conrail merger takes place due to the $1B+ opportunity costs that are associated with the potential deal. In terms of following the rules of max price NS would be willing to pay more than CSX however may be somewhat limited based on the $300M dollar breakup fee. Conrail Standalone Value (Oct 14th 1996) Pre-announce Stock Price 71.00 $ Shares Outstanding (million) 90.5 Market Capitalization, Standalone ($ million) 6,425.5 Conrail Advisory Fee % (as % of deal value) 0.30% TaxRate 35.0% CSX NS Acquirer Advisory Fee % 0.18% 0.25% Conrail Standalone Value 6,425.5 6,425.5 Total Synergies + Opportunity Cost 4,342.8 4,401.3 Deal Value 10,768.3 10,826.8 Deal Expenses Conrail Advisory Fee 32.3 32.5 Deal Expenses 19.0 27.1 Deal Expenses Paid by Conrail 32.3 32.5 Break-up fee Paid by Conrail (reduction in equity market cap) - 300.0 Pre-Tax Deal Expenses 83.6 392.0 Taxes (29.3) (137.2) After-Tax Deal Expenses 54.3 254.8 Maximum Purchase Price (Deal Value minus After Tax Deal Expenses) 10,714.0 10,572.0 Price/Share 118.39 $ 116.82 $
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Transcript of Consolidated Rail Assignment_writeup
Why did NS make a hostile bid for Conrail?
NS made a hostile bid for Conrail for 3 primary reasons a) a merger of CSX-Conrail posed a serious risk to NS in
terms of over $1B dollars lost in opportunity costs b) Conrail was considered a scarce jewel as they controlled
greater than 29.2% of the rail freight market east of the Missippi c) Conrail's revenue per mile of track
operated, per carload originated and per ton originated were the highest in the industry but the least
profitable. Elimination of redundant costs would create synergies for NS and create additional value that
Conrail cannot realize as an independent company.In a bidding war, who should be wiling to pay more, NS or CSX ? Please provide numbers (valuation analysis) to support your
view
Based on the stand-alone value of Conrail and the present value of future synergies, NS should be willing to
pay more for Conrail than CSX should. H owever in head to head competition NS will not be able to pay as
much as CSX without diminishing the value of the stock. NS stands to lose more if the CSX-Conrail merger
takes place due to the $1B+ opportunity costs that are associated with the potential deal. In terms of
following the rules of max price NS would be willing to pay more than CSX however may be somewhat limited
based on the $300M dollar breakup fee.
Conrail Standalone Value (Oct 14th 1996)
Pre-announce Stock Price 71.00$
Shares Outstanding (million) 90.5
Market Capitalization, Standalone ($ million) 6,425.5
Conrail Advisory Fee % (as % of deal value) 0.30%
TaxRate 35.0%
CSX NS
Acquirer Advisory Fee % 0.18% 0.25%
Conrail Standalone Value 6,425.5 6,425.5
Total Synergies + Opportunity Cost 4,342.8 4,401.3
Deal Value 10,768.3 10,826.8
Deal Expenses
Conrail Advisory Fee 32.3 32.5
Deal Expenses 19.0 27.1
Deal Expenses Paid by Conrail 32.3 32.5
Break-up fee Paid by Conrail (reduction in equity market cap) - 300.0
Pre-Tax Deal Expenses 83.6 392.0
Taxes (29.3) (137.2)
After-Tax Deal Expenses 54.3 254.8
Maximum Purchase Price (Deal Value minus After Tax Deal Expenses) 10,714.0 10,572.0
Price/Share 118.39$ 116.82$
Date:10/31/2010 DCF Valuation of synergy
Type of Analysis: DCF Valuation of Synergy
Time Stamp: 11:05pm TaxRate 35%
GrowthRate 3%
WACC 12.85%
in millions of dollars
CSX acquires Conrail 1997 1998 1999 2000 2001 2002
Synergies
Total gain in operating Income 0 240 521 730 752
NOPAT (Operating Income x (1 - TaxRate) 0 156 339 475 489
Discount factors 0.8861 0.7852 0.6958 0.6166 0.5464
Present Value 0 122 236 293 267
Total Present Value 918$
Terminal Value 5,111$
PV Terminal Value 2,793$
Total Synergy 3,710$
Opportunity cost
CSX's Total Loss in Operating Income (Should NS acquire Conrail) - 66.00 123.00 189.00 196.00
NOPAT (Operating Income x (1 - TaxRate) - 42.90 79.95 122.85 127.40
Discount factors 0.8861 0.7852 0.6958 0.6166 0.5464
Present Value - 34 56 76 70
Total Present Value 235$
Terminal Value 728$
PV Terminal Value 398$
Total Opportunity Cost 632$
Synergies + Opportunity Cost 4,343$
DCF Valuation of synergy
TaxRate 35%
GrowthRate 3%
WACC 12.85%
in millions of dollars
Norfolk Southern acquires Conrail 1997 1998 1999 2000 2001
Synergies
Total gain in operating Income - 231 429 660 680
NOPAT (Operating Income x (1 - TaxRate) - 150.15 279 429 442
Discount factors 0.8861 0.7852 0.6958 0.6166 0.5464
Present Value - 118 194 265 241
Total Present Value 818$
Terminal Value 4,622$
PV Terminal Value 2,525$
Total Synergy 3,343$
Opportunity cost
CSX's Total Loss in Operating Income (Should NS acquire Conrail) - 130 232 309 320
NOPAT (Operating Income x (1 - TaxRate) - 85 151 201 208
Discount factors 0.8861 0.7852 0.6958 0.6166 0.5464
Present Value - 66 105 124 114
Total Present Value 409$
Terminal Value 1,188$
PV Terminal Value 649$
Total Opportunity Cost 1,058$
Synergies + Opportunity Cost 4,401$
DCF Valuation of synergy
TaxRate 35%
GrowthRate 3%
WACC 12.85%
in millions of dollars
Norfolk Southern acquires Conrail 1997 1998 1999 2000 2001
Synergies
Total gain in operating Income - 231 429 660 680
NOPAT (Operating Income x (1 - TaxRate) - 150.15 279 429 442
Discount factors 0.8861 0.7852 0.6958 0.6166 0.5464
Present Value - 118 194 265 241
Total Present Value 818$
Terminal Value 4,622$
PV Terminal Value 2,525$
Total Synergy 3,343$
Opportunity cost
CSX's Total Loss in Operating Income (Should NS acquire Conrail) - 130 232 309 320
NOPAT (Operating Income x (1 - TaxRate) - 85 151 201 208
Discount factors 0.8861 0.7852 0.6958 0.6166 0.5464
Present Value - 66 105 124 114
Total Present Value 409$
Terminal Value 1,188$
PV Terminal Value 649$
Total Opportunity Cost 1,058$
Synergies + Opportunity Cost 4,401$
