Conrail
G455: Corporate Restructuring Team 7
1) Why does CSX want to buy Conrail?
In an industry beset by limited options to consolidate domestic rail traffic, CSX looked at Conrail as an avenue to increase market share and gain access to the North East rail network. With air travel, road travel and trucking taking an increasing share, significant revenue growth became difficult. As Conrail became profitable, Congress explored ways of privatizing it, giving CSX an opportunity to acquire Conrail. Though Conrail suffered from performance inefficiencies it had certain strengths relative to CSX and Norfolk with respect to highest revenue per mile of track operated, per carload originated etc. Conrail with operating revenue of $3,686
…show more content…
Further assume that none of these acquisitions will affect the acquirer’s equity cost of capital.
3) Based on the data in Exhibit 7 and the definition of operating income gains given above, how much should CSX be willing to pay for Conrail? Support your answer with appropriate analysis. According to operating income gains we can value a firm’s market price as its pre-merger value and the present value of gains in operating income. Let’s assume that value of Conrail before the merger is equal to its market cap. Then taking Conrail share price as $71.94 (average of year end and high stock price) and number of shares outstanding as 90.5 million shares (Exhibit 6) we get Conrail market value equal to $6,510.57 million ($71.94 x 90.5 million). We assume G =3%, MRP = 7%. We take risk free as 30-year maturity US Bonds rate, which is 6.83% (Exhibit 8); merged CSX-Conrail equity beta as average of CSX and Conrail equity betas, which is 1.33. rE = rf + MRP βE = 6.83% + 7% x 1.33 = 16.11% Now we can find Conrail’s synergy value as present value of gains in operating income. 1997 Total Gain in Operating Income Total Gain in OI after 40% Tax Gain in OI (discounted @ rE) $ $ $ 1998 $ 88 $ 12.80 $ 7.15 $ $ $ 1999 396 237.60 176.26 $ $ $ 2000 550 330.00 210.84 2001 $ 567 $ 340.20 $ 187.21
Value of estimated gains = $671.46 Terminal value = $2,673.83 Present value of Terminal Value = $2,365.67 Conrail’s Synergy Value is equal to $3,047.13. See ‘Calculations’ spreadsheet
3. A break-up fee of $300 million charged to Conrail. This guarantees that CSX will not lose the money they used to pay for the deal’s fees while compensating the Company for their time spent and reputation involved with the deal. This demotes Conrail to consider other bidders or to decline the merger in such a late stage of the deal process. On the other hand, this could also benefit Conrail because if another bidder emerges then that new bidder would be required to pay at least $300 million extra to Conrail to cover the break-up fee.
Fifteen thousand men. One thousand- two hundred dead. Twenty thousand pounds of bones. One thousand, seven hundred and fifty- six miles of railways. The creation of the transcontinental railroad began in 1863. It originated in the northern states and made its way to the west. Nobody knew that one day this new technology would lead to the future that we live today. During the time that the railroad was in the process of being created, many things were escalating in the US, all for the best. The Transcontinental Railroad transformed the United States more economically by creating new opportunities, improving transportation, and boosting imports and exports.
Use the adjustment rates in Exhibit 6 to calculate the profit of the Gradefes and Madrid-Barrio de Salamanca branches, according to the procedure described in the profitability analysis section of the case.
In 2012, Bluebird Corporation had net income from operations of $75,000. Further, Bluebird recognized a long-term capital loss of $30,000, and a short-term capital gain of $10,000. Which of the following statements is correct?
3. SciTronics had a total of $112, 000 (75,000+20,000+7,000+10,000) of capital at year-end 2008 and earned before interest but after taxes (EBIAT) 16,000 (26,000-10,000)
. It is very possible that rail is currently permitting something of awakening. Countries that have not traditionally had a culture of rail transit, and regions where there has been a history of underinvestment, are changing course with power. Fantasying how rail adventures might be competed in 2050 and the coming years will help shape the rising role that rail will play in our future.
The cumulative net profit increase of about 50% (Sheet 1, cell L18) shows that Richardson’s net profit on
D. Using information in the restated financial statements in ex 6.31-6.33, the financial ratios in ex 6.34 and the information provided in this case, as a commercial banker,
The revised business plan issued in 2009 used the same CSI methodology but tested slightly higher fares. That plan estimated that train fares set at 83 % of airfare would generate the greatest operating profit. At 83 % it can attract just over 40 million annual passengers whereas at 50 % it would attract 54 million.
The Net Present Value of the additional cash flows due to these two areas of synergy is comes to $461.6 million. The valuation of ATC with the effect of synergy rises to $13,296.39 million or rounded to $13.30 billion. SENSITIVITY ANALYSIS (Indicates in worksheet “Sensitivity Analysis” in separate sheet) Private Company Discount: The discount related to illiquidity of private investments which diminishes as revenue of company increases. This discount bounded on lower end by cost of going public equal to 10%. Growth Rate (g): The growth rates which are used in terminal value calculation can have a tremendous effect on terminal value. To illustrate, 1.5% to 2.5% Δ in growth rate has a $3.000 B to $7.000 B effect. Potential Synergy: The increase in revenue from bundled service offerings (BODIE & MERTON, 2000) could be higher or lower than expected. To illustrate, a 20% change in revenue has a $1.000 B effect on Air Thread’s value. RECOMMENDATION AND CONCLUSION Through thoughtful valuation, it is imperative to note that, the Air Thread Connection cash flow tends to increase from the year 2008 to 2012 which indicates the financial stability of the company. Since the stability and its internal systems and policies seem to
[Market value of the acquiring firm + NPV of the merger] ÷ [Number of shares outstanding]
c) (2.5 points) Add the capital income, rK, to the labor income, wL, and show that it is equal to the
C. What are the net operating cash flows during the years 1, 2, and 3?
The decision of a firm to merge or acquire another firm comes with a tremendous amount of due diligence. Due diligence in, not simply acquiring all of the available knowledge that it can regarding the company it seeks to acquire, but also understanding the financial health of themselves and their ability to acquire another firm and benefit from the potential synergies realized. Companies must also assess the risks involved of the potential acquisition, and if the numbers prove worthwhile, decide how the company plans to fund the transaction. Many companies hesitate in making such major transaction decisions, however “mergers and acquisitions are the lifeblood of growth” (DiPietro, 2010, p. 18). A critical component of capital budgeting is risk analysis (Correia, 2012). Risk analysis includes assessing risk and adjusting for risk in order to measure return variability and the probability of not reaching the required rate of return that deems and investment a worthy choice (Correia, 2012). This practice, called sensitivity analysis, becomes compulsory to any firm that desires making sound investment and capital structure decisions.