Conral CSX case
Conrail has received two acquisition bids from CSX and Norfolk Southern.
Conrail and CSX, the nation’s first and third largest railroads, have decided to participate in a merger of equals. CSX has offered to acquire Conrail in a two tiered deal. The first 40% of tendered Conrail shares will be bought at a price of $92.50 while the remaining 60% will be acquired through a stock swap at a ratio of 1.8561921 (CSX:Conrail). In the midst of this offer, a hostile Bid comes in from Norfolk Southern, a competitor in the Industry. Norfolk Southern offers ____
Case A, Question 1: Why is CSX interested in Conrail? How ...view middle of the document...
Whether the deal was motivated by fear or strategic positioning, the merger will improve the competitive positioning of CSX, ultimately making the combined CSX-Conrail company extremely powerful in the industry.
CSX should pay somewhere between $93.73 and $110.55 for Conrail. This range is based on transaction multiples analysis (EPS, Sales, EBITDA) used in previous railroad deals (calculated using only completed deals) and a Discounted Cash Flow approach of incremental cash flow including the revenue gained from rival Norfolk Southern (See exhibits A and B for details).
Case A, Question 2a: Analyze the structure of the CSX-Conrail deal. Why did CSX make a two tiered offer? What effect does this structure have on the transaction?
CSX likely made a two tiered deal due to financial and regulatory considerations. They use the first tier cash offer of $92.50 to gain control of the stock, and will then force the remaining shareholders to accept a lower value of $86.78 (derived from the exchange ratio of 1.85619 and the initial CSX stock price of $46.75) in the form of a stock swap, thus saving cash. Additionally, because the merger was taking place in Pennsylvania there were many specific regulatory requirements which explain why the first tier section of the deal was further split into two stages.
-first offer taking only 19.3% to avoid Pennsylvania one price deal and turn it into a vote
-after first offer have 35.6% including mgmt, and need 14% to get opt out approval for a two tiered offer
-use second offer of 92.50 to entice shareholders to vote for opt out provision
-give remaining 60% of shareholder a lower value to reduce value paid.
Case A, Question 2b: What are the economics rationales and takeover implications of the various provisions in the merger agreement (no talk clause, lock up options, break up fee, poison pill)
|Provision |Economic Rationale and Takeover Implications |
|No talk clause-Conrail is unable to engage in |This ensures that CSX’s investment of time and money is worthwhile, as it lessens the chances of |
|merger talks for a period of 6 months unless |another bidder entering the picture, and either blocking the deal or significantly raising its |
|certain conditions are met: |cost. |
|1)Considering another offer is necessary to |Pennsylvania law does give the Board of Directors more leeway than is present in other states in |
|meet fidicuary responsibilities to |regards to fidicuary responsibility, thus increasing the probability that Conrail could consider |
|shareholders. |other offers. This is a positive attribute for Conrail as it allows them more opportunity to |
|2)Another offer emerges that makes it unlikely...