Copy of Conrail-B_Valuation_Final by ay2002

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									Exhibit - 1 WACC Analysis for Conrail Corporation, CSX, & Norfolk Southern
Step I. Calculate Unlevered Beta for Conrail Corporation, CSX, & Norfolk Southern Book Value of Debt 2,105 4,767 1,900 PriceMarket Earnings Shares Value of Ratio Outstanding Equity 4.59 4.00 6.09 15.5 12.4 15.1 90.50 213.63 126.44 6,425.5 10,574.8 11,632.2
1

Levered Beta Conrail Corporation CSX Norfolk Southern 1.30 1.35 1.15

EPS

D/E 0.328 0.451 0.163

2

Tax Rate 35% 35% 35%

Unlevered Beta

D/(D+E)

3

Rating A BAA AA

1.07 0.246762 1.04 0.310719 1.04 0.140406

Step II. Calculation of WACC for Conrail Corporation, CSX, & Norfolk Southern

% Debt Conrail Corporation CSX Norfolk Southern

a

D/(D+E) 0.247 0.311 0.140

Corresponding Rating A BAA AA

Cost of Debt c 7.71% 8.11% 7.62%

E/(D+E) 0.753 0.689 0.860

Risk Free Levered Rate d Beta 5.61% 5.61% 5.61% 1.30 1.35 1.15

Risk Premium e 5.68% 5.68% 5.68%

Cost of Equity 12.99% 13.28% 12.14%

WACC 11.02% 10.79% 11.13%

25% 31% 14%

1

The P/E ratio for each company is calculated by dividing each company's share price PRIOR to the announcement of any merger plans by each company's Fully Diluted EPS. According to Exhibits 6a & 6b, the applicable federal income tax rate is 35%. Ratings were estimated and assigned based on each company's D/(D+E) ratio and information provided in the case. Debt ratio is calculated by using Conrail's Consolidated Balance Sheet for 1992-1996. Debt is comprised of Current Portion of Long-Term Debt, Short-Term Debt and Long-Term Debt. Based on our analysis of D/(D+E) ratios and bond ratings of comparable diversified chemicals companies. Cost of debt is based on Yields on Long-Term Corporate Bonds as provided in Exhibit 11 of the case. Risk free rate equals Yield on 1-year U.S. Treasury Bond Taken as the arithmetic average of the risk premium of S&P500 over the 10-year Treasury Bonds less survivorship bias of 1.75%

2 3

a b c d e

Exhibit - 2 Valuation Assumptions: Conrail Corporation, CSX, & Norfolk Southern
Income Statement 1997
1

1998 2.7% 8.4% 2.7% 8.4%

1999 2.7% 8.4%

2000 2.7% 8.4%

2001 2.0% 3.0%

Revenue Growth Conrail Corporation Operating Income Growth Conrail Corporation Tax % 35%

1

Balance Sheet 1997
2

1998 1.0% 1.0%

1999 1.0%

2000 1.0%

2001 1.0%

Working Capital as a % of Sales Conrail Corporation

Valuation Discount Rate Ongoing Growth
1 2

CSX Norfolk Southern 10.8% 11.1% 3.0% 3.0%

Growth Rates for 1997 - 2001 are based on each company's Compound Annual Growth Rate for 1992-1996. Working Capital is assumed to be a Fixed % of Sales and is based on 1996 information.

Exhibit - 3 DCF Valuation: Conrail Value to CSX
1997 1998 1999 2000 2001 -

Revenue Operating Profit Core Incremental Total Cash Taxes Paid NOPLAT Working Capital Change in Working Capital

$

3,812

$

3,913

$

4,017

$

4,124

$ $ $ $ $ $ $

797 797 279 518 38 13

$ $ $ $ $ $ $

864 240 1,104 386 718 39 1

$ $ $ $ $ $ $

936 521 1,457 510 947 40 1

$ $ $ $ $ $ $

1,014 730 1,744 611 1,134 41 1

Free Cash Flow (FCF) Terminal Value Present Value of FCF PV of Terminal Value Total PV Existing Shares Outstanding Price per Share

$

505

$

717

$

946

$

1,133

$ $

1,167 14,977 699 8,973

$

456

$

584

$

696

$

752

$ $

$

12,159 90.5

$

134.4

Exhibit - 4 DCF Valuation: Conrail Value to Norfolk Southern BEFORE CSX Merger Agreement is Signed
1997 1998 1999 2000 2001 -

Revenue Operating Profit Core Incremental Total Cash Taxes Paid NOPLAT Working Capital Change in Working Capital

$

3,812

$

3,913

$

4,017

$

4,124

$ $ $ $ $ $ $

797 797 279 518 38 13

$ $ $ $ $ $ $

864 231 1,095 383 712 39 1

$ $ $ $ $ $ $

936 429 1,365 478 887 40 1

$ $ $ $ $ $ $

1,014 660 1,674 586 1,088 41 1

Free Cash Flow (FCF) Terminal Value Present Value of FCF PV of Terminal Value Total PV Existing Shares Outstanding Price per Share

$

505

$

711

$

886

$

1,087

$ $

1,120 13,770 661 8,123

$

455

$

575

$

646

$

713

$ $

$

11,173 90.5

$

123.5

Exhibit - 5 DCF Valuation: Conrail Value to Norfolk Southern AFTER CSX Merger Agreement is Signed
1997 1998 1999 2000 2001 -

Revenue Operating Profit Core Incremental Gains from Merger Loss incurred if CSX-Conrail merge Total Cash Taxes Paid NOPLAT Working Capital Change in Working Capital

$

3,812

$

3,913

$

4,017

$

4,124

$ $ $ $ $ $ $ $

797 797 279 518 38 13

$ $ $ $ $ $ $ $

864 231 130 1,225 429 796 39 1

$ $ $ $ $ $ $ $

936 429 232 1,597 559 1,038 40 1

$ $ $ $ $ $ $ $

1,014 660 308 1,982 694 1,289 41 1

Free Cash Flow (FCF) Terminal Value Present Value of FCF PV of Terminal Value Total PV Shares Outstanding Price per Share

$

505

$

795

$

1,037

$

1,287

$ $

1,326 16,306 782 9,619

$

455

$

644

$

756

$

844

$ $

$

13,100 90.5

$

144.7

Exhibit - 6 Comparables Multiples Analysis
Offer Price as a Multiple of EPS Book Value 21.4X 14.6 13.4 18.3 18.4 4.5X 1.7 2.8 5.5 3.7 Total Enterprise Value as a Multiple of Sales EBITDA 2.6X 3.6 1.8 2.4 1.7 13.1X 9.9 9.2 8.5 12.2 Projected Four Week Merger Synergies Acquisiton Premium ($ millions) 73% $ n/a 52% 34% $ 54% $ 560 n/a n/a 250 660 Synergies as a Percent of Target's Operating Expenses 22.3% n/a n/a 27.7% 24.5%

Target Santa Fe Pacific Kansas City Southern Santa Fe Pacific Chicago and North Western Southern Pacific

Acquirer Burlington Northern Illinois Central Union Pacific Union Pacific Union Pacific

Comparables Average Conrail

(a)

19.4 Norfolk Southern

4.6

2.2

11.3

$ $

490 932
(b)

24.8% 26.1%
(c)

Conrail Financial Data (from Exhibit6 - Conrail-A) Offer Price suggested by multiples (d)

Book EPS Value/share $ 4.91 $ 32.46 $ 95.09 $ 148.23

Conrail Financial Data (from Exhibit6 - Conrail-A) Total Enterprise Value Suggested by Multiples (d)

Sales $ 3,722 $ 91.85

$ $

EBITDA 1,017 126.61

(a)

Arithmetic average of comparable deals. All three deals, namely, Santa Fe Pacific, Chicago and Northwestern, and Southern Pacific are used to find comparable avareges, other two deals were left out since they were withdrawn. (b) Present value of total gains in operating income. (c) Calculated by dividing present value of total gains by operating expenses for 1996. (d) Calculated by multiplying Conrail financial data by the comparables average multiple.

Income Statement Conrail Corporation, CSX, & Norfolk Southern
Per Financial Statement 1993 1994 1995 $ 3,453 8,767 4,460 $ 3,733 9,409 4,581 $ 3,686 10,304 4,668 $ 1 1997 $ 3,812 11,101 4,811 $ 2 1998 3,913 11,696 4,853 $ 3 1999 4,017 12,323 4,896 $ 4 2000 4,124 12,983 4,938 $ 5 2001 4,206 13,243 4,963 22,412 2% 2% 0%

1992 Revenue Conrail Corporation CSX Norfolk Southern Total Revenue % Growth - Conrail % Growth - CSX % Growth - Norfolk Southern
1

1996 3,714 10,536 4,770

$

3,345 8,550 4,607 16,502 -

$

$

16,680 $ 3% 3% -3%

17,723 $ 8% 7% 3%

18,658 $ -1% 10% 2%

19,020 $ 1% 2% 2%

19,725 $ 3% 5% 1%

20,463 $ 3% 5% 1%

21,235 $ 3% 5% 1%

22,045 $ 3% 5% 1%

Operating Income Conrail Corporation CSX Norfolk Southern $

534 965 887 2,386 $

591 1,006 860 2,457 $ 11% 4% -3%

690 1,182 1,065 2,937 $ 17% 17% 24%

741 1,383 1,085 3,209 $ 7% 17% 2%

736 1,522 1,197

$ $ $

797 1,522 1,290 3,610 $ 8% 0% 8%

864 1,522 1,390 3,777 $ 8% 0% 8%

936 1,522 1,499 3,957 $ 8% 0% 8%

1,014 1,522 1,615 4,152 $ 8% 0% 8%

1,045 1,568 1,664 4,276 3% 3% 3%

Total Operating Income % Growth - Conrail % Growth - CSX % Growth - Norfolk Southern EBIT Conrail Corporation CSX Norfolk Southern Total EBIT Interest Expense Conrail Corporation CSX Norfolk Southern Total Interest Expense EBT Conrail Corporation CSX Norfolk Southern Total EBT Taxes Conrail Corporation CSX Norfolk Southern Total Taxes Net Income Conrail Corporation CSX Norfolk Southern Total Net Income
1

3,455 $ -1% 10% 10%

534 266 887 $ 1,687 $

591 913 860 2,364 $

606 1,182 1,065 2,853 $

456 1,126 1,085 2,667 $

601 1,522 1,197 3,320 $

797 1,522 1,290 3,610 $

864 1,522 1,390 3,777 $

936 1,522 1,499 3,957 $

1,014 1,522 1,615 4,152 $

1,045 1,568 1,664 4,276

74 273 11 $ 358 $

151 280 (39) 392 $

74 176 17 267 $

64 152 (29) 187 $

70 206 0 276 $

70 206 0 276 $

70 206 206 482 $

70 206 206 482 $

70 206 206 482 $

70 206 206 482

460 (7) 876 $ 1,329 $

440 633 899 1,972 $

532 1,006 1,048 2,586 $

392 974 1,114 2,480 $

531 1,316 1,197 3,044 $

727 1,316 1,290 3,334 $

794 1,316 1,184 3,295 $

866 1,316 1,293 3,475 $

944 1,316 1,409 3,670 $

975 1,362 1,458 3,794

178 (27) 318 $ 469 $

280 274 127 681 $

208 354 381 943 $

128 356 402 886 $

189 461 427 1,077 $

255 461 452 1,167 $

278 461 415 1,153 $

303 461 452 1,216 $

331 461 493 1,284 $

341 477 510 1,328

282 20 558 $ 860 $

160 359 772 1,291 $

324 652 667 1,643 $

264 618 712 1,594 $

342 855 770 1,967 $

473 855 839 2,167 $

516 855 770 2,141 $

563 855 840 2,259 $

614 855 916 2,385 $

634 885 948 2,466

Operating Income has been adjusted for special charges where applicable.

Balance Sheet Conrail Corporation, CSX, & Norfolk Southern
Per Financial Statement 1993 1994 1995 $ 1,062 $ 1,125 $ 1,206 1,935 1,344 4,485 $

1992 Current Assets Conrail Corporation CSX Norfolk Southern Current Assets Current Liabilities Conrail Corporation CSX Norfolk Southern Current Liabilities Working Capital Conrail Corporation CSX Norfolk Southern Working Capital Working Capital - as a % of Sales Conrail Corporation CSX Norfolk Southern $ $ $ 790

1996 1,117 2,072 1,456 4,645

$

790

$

1,062

$

1,125

$

$

1,279

1,075

1,201

1,170 2,991 1,206 $ 5,367 $

1,092 2,757 1,190 5,039

1,279

$

1,075

$

1,201

(489) (489) $

(13) (13) $

(76) (76) $

36 (1,056) 138 (882) $

25 (685) 266 (394)

15% -

0% -

2% -

1% 10% 3%

1% 7% 6%


								
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