Csx and Conrail Merge Case Study

Part A

1. Why does CSX want to buy Conrail?

A CSX-Conrail merged company would capture 70% of the Eastern railway market and generate $8.5 billion revenue.  The benefits of a merger are not simply in size, however, as combining operations would create a number of cost and revenue synergies.

CSX is a diversified transportation company that offers services ranging from ocean-container shipping and barging to railroad services.  Despite offering a variety of services, it is the largest railway company in the US with routes primarily in the Southeast and Midwest.

Conrail, on the other hand, focuses strictly on railroad and dominates the Northeast of the United States.  Its most valued routes connect Northeast cities, including New York, to the Midwestern hubs.  In the Northeast region, trucking is a strong competitor within the freight market.  Although the company has an attractive position in the Northeast rail market, it is the least efficient business in the sector.

The combination of Conrail and CSX creates cost synergies by removing duplication within management and operations.  Firstly, Conrail’s CEO would assume CEO responsibilities for the merged company, thereby replacing the current CSX CEO.   More importantly, however, is the benefit that arises from linking railway routes.  The combined routes would allow for long-haul services between the Southeast and Northeast, as well as the Midwest.  The lower costs would enable the joint company to increase margins or offer lower prices, increase competitiveness and grow its market share.   Cost reductions would save the joint company $370 million in annual operating income by 2000, net of merger costs.

Revenue synergies would amount from the trucking industry, by taking market share from Norfolk.  These would yield an additional $180 million in annual operating income.  This number includes the loss incurred by allowing Norfolk to access trucking markets currently dominated by CSX.

A CSX-Conrail merger would create a number of synergies both on the cost and revenue side.  However, it’s worth noting that many of the synergies are a result of taking from Norfolk, rather than creating new value in the industry.   Hence, some analysts argue that a major incentive for CSX is to avoid a Norfolk-Conrail merger, which would have a mirror impact on CSX revenues.

2. How much should CSX be willing to pay? Is there evidence to suggest CSX might be overpaying?

According to our analysis, CSX is making an offer with a total transactional value of approximately $10.408 billion. This amount is comprised of an equity offer of $8.3 billion and a debt cost of approximately $2.108 billion. Including the fixed M&A fees of $19 million, the total transactional value of CSX’s offer is approximately $10.427 billion.

Based on the EV/Sales and EV/EBITDA multiples, which are 2.45 and 7.4, this offer is in line with other acquisition deals between railroad companies. Specifically, this offer is similar to acquisitions made by Union Pacific of Chicago and North Western and Southern Pacific and by Burlington Northern of Santa Fe Pacific.