Conrail (A) & (B) Case Solution
On October 15th, 1996, Pennsylvania-based Consolidated Rail (Conrail) and Virginia-based CSX;the third and first largest retailers in the eastern US,announced their decision of having a merger in a friendly deal, which was worth 8.3 billion dollar. The deal between Conrail and CSX was a part of the industry-wide trend toward consolidation as well as a promise to change the retail market’s competitive dynamics. The valuation of Conrail as an acquisition target is the company’s foremost concern. Eight days after the announcement was made by CSX that it was going to acquire Conrail; a hostile bid of $100 share was proposed by Norfolk Southern for Conrail.
There are significant number of reasons due to which CSX contemplated to purchase Conrail, such as: the rail network of Conrail connects 20 Southeastern and Midwestern states and the Canadian Province of Ontario. Additionally, the merger of CSX and Conrail would create entity with more than $8.5 billion in rail revenues and almost 70percent of the eastern market. Furthermore, it has control over the entire Northeast rail market, due to which the combined rail networks of the CSX and Conrail would help in having low cost in currences, contagious, and long haul service among Midwest, southern parts and northeast. Likewise, the better competitive positionis another point in merger, with Conrail in both short-haul and long-haul routes through cost-reduction. Norfolk also showed an interest in buying Conrail at times when the government-intended to prioritize the company. Therefore, the acquisition bid by CSX could be the preemptive attempt to restrict Norfolk from buying Conrail as well as gaining the market dominance.
The case explores the financial and strategic implications of the bidding war.
Multiple valuation to value Conrail
For the valuation price of Conrail; the multiple approach is used to determine the price of the share of Conrail. To begin with, two comparable are excluded from the analysis, including: Santa Fe pacific and Kansas City Southern, on account of the fact that their offers have been withdrawn. As the process of offering was incomplete; these comparables could not be the suitable indicators for the valuation of Conrail. Additionally, the value of synergies for these two comparables is missing. The comparable selected on the basis of various factors; all of the peer members are part of the similar industry and are faced with similar exposure. The leverage structure shows that the comparable or peer group is less profitable as compared to Conrail,in terms of net income.(Gil, 2016).
There are various multiples that are used to value Conrail, which include price earnings ratio, price to book value, enterprise value to earnings before interest, tax,depreciation and amortisation and enterprise value to sales. From the recent transaction; the average of the mentioned multiples is used for calculating the implied value of Conrail. After taking the average of all multiples of different peer groups; the data of Conrail provided in the case is multiple with each multiple of peer groups to evaluate the appropriate price per share for CSX to offer for Conrail. With the use of price to sales and price to EBITDA multiple; the value of firm are found out to be $7630 million and $10525 million, from which the debt amount of $2094 is deducted to calculate the value of equity and divided by the number of outstanding shares of 90.5 million…………
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