Case 4

Topics: Stock market, Norfolk Southern Railway, Consolidated Rail Corporation Pages: 3 (1046 words) Published: May 3, 2015
The Acquisition of Consolidated
Rail Corporation (A)

Group 3:
Antonio Carlos Teles Caleia #1028
Federica Carcani #2258
Edoardo Covicchio #2259
Leandro José Pereira Domingues #1023
Francesca Romana Gambini #2260

Mergers, Acquisition and Restructuring (TB)
Prof. Josè Neves de Almeida

The rationale behind the intention of CSX to buy Conrail is mainly to anticipate a proposal from the other big player in the market Norfolk Southern. Both CSX and Norfolk Southern have basically the same routes and the latter company holds an advantage which is its capability to manage costs – more efficient. In case Norfolk Southern acquires Conrail, CSX will have serious problems to compete against them because they will have a wider range of connections and they will continue to be more efficient. Besides the anticipation move, CSX would have synergies that come from cost cutting and revenue increase. They estimate a $ 370 million annual saving after the consolidation of the overlapping routes and closing of unprofitable ones. In the revenue side, they expect to steal market share both from the trucks and Norfolk Southern which will have an annual impact on EBIT of $ 180 million.

The DCF valuation led to a value of $11.2 billion and the transaction multiples to a value of $10.8 billion. The proposed bid of $8.3 billion made has an implicit growth rate of 1% in the DCF valuation and an implied EV/EBITDA multiple of 8.2x. This is regarded has too low since the inflation rate is expected to be at 3% and so the revenues are expected at least to grow at this rate, and in the case of the multiples similar transactions had multiples of 12.2x and 13.1x. Moreover, as CSX is very likely to have competition in the acquisition form Norfolk Southern, this value becomes even more unsatisfactory.

The offer is structured as a friendly takeover. Conrail’s management and board of directors agree to the merger plan of creating an entity that would entail almost 70%...
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