EMBA 24 - Class of 2022

Course Number : EC02

Course Title : MERGERS & ACQUISITIONS
Professor : Proff ANAS ABOULAMER
 GRADE
 Student ID : Wael Ramadan 21-8300  
Wissam Itani 21-5479
Paul Ghanimeh 21-8178
Aline Demergian
Agenda

• Executive Summary
• Industry analysis
• Company backgrounds
• Merging model analysis
• Valuation
• Conclusion & recommendations
Executive Summary

 Canadian Pacific saw an opportunity to enhance the operations at NS and grow its
business further to the expected growth of US rail industry
Brief Overview
 NS had made their own projection to enhance their operations up to 2021
 NS hesitating to accept CP merging offer
 1st attempt : Friendly offer of 46.72 $ cash + 0.348CP share / NS share
Proposed Offer
 2nd attempt : Revised offer to NS of 32.86 $ cash + 0.451CP share / NS share
 Sweetened offer :2nd attempt + CVR for 18 months guaranteeing a
minimum price share of 175 $ with compensation up to 25 $ / share max
Industry analysis

 Current US economy growth conditions are favorable

Macro
Overview
 US inflation has been increasing regularly in recent years
 More people in US , more freight , more growth of transportation

 25% of U.S. rail traffic passed through Chicago

Industry Overview  The US Rail Industry, the industry is expected to grow at an average annual
rate of 2.9%, up to $87.5 billion by 2021
 U.S. 60 billion dollar rail industry , affected by oil price increase

 Highly controlled merging activities by Surface Transportation Board

Industry
regulations
 Skeptical attitude towards claims of merger benefits
 Long process , no guaranteed merger demand review
Company backgrounds
Norfolk Southern
Company Overview

 Freight transportation railroad company

 Transports freight over a network in the eastern half of the US, Ontario and Quebec
 Transport coal, and general merchandise, including automotive products and chemicals
 Facing significant drop in revenues and income , coupled with an increase in operational expenses

Historical Stock Price Revenues trend

$1 1,50 0
$120
$1 1,00 0
$110
$100 $10,50 0

$90 $1 0,00 0
$80
$9 ,5 00
$70
$60 $9 ,0 00
201 1 201 2 2013 2 01 4 2 01 5
No v-14 Jan-15 Mar-15 May-15 Jul-15 Sep -15
Company backgrounds
Canadian pacific
Company Overview
 Freight transportation railroad company
 CP has access to 12,500 miles of rail across Canada and the United States stretching from the Northeastern
United States, through the Midwest, all the way to Vancouver ( 7600 miles CA and 4900 US)
 Their rail services include bulk 12 commodities, merchandise freight, and intermodal transportation
 Operating efficiently with operating ratio less than 65 % ( 60.5 % )
Historical Stock Price Revenues trend
Merging model analysis
Opportunities

 CP operating ratio lowered from 81% to 61% over five years

Optimize
Efficiency
 NS maintains high operating ratio at 71% aiming less than 65 %
 CP’s strong management team

 Difficult to expand rail lines

Stagnated
Infrastructur
 High cost of infrastructure
e Growth  Only way to maintain growth is through M&A
 High barrier to entry in the industry
 CP and NS meet end to end in Chicago and Detroit
Potential For
New Territory
 NS rails cover the east coast of the United States
 CP rails cover the majority of Canada
Merging model analysis
Synergies & Benefits

0
Merging model analysis
Transaction Risks & Mitigations

Company becomes too

• Same industry/size of competitors
large to manage • CP-NS: 32,000 miles of track BNSF: 33,000 miles track
effectively • CP’s strong management team can be beneficial

Higher costs of • Cost and revenue synergies from the merger

premiums • CP can access more value in NS because of the rail network

• NS would benefit from the CVR and operational efficiency enhancement

STB does not
• NS and CP might experience an important decrease in their share
Approve the merging
prices with higher possible decline for CP
Valuation
CAPM

Future FCF ( NS) Risk Free Rate 1.67%

Market Return (S&P 500) 9.30%
2016 2017 2018 2019 2020 Beta 1.13
Cost of Capital 10.29%

EBIT 3,210 3,470 3,683 3,913 4,118 WACC

Capex (2,070) (1,910) (1,930) (1,930) (1,949) Cost of Dept (42%) 4.28%
Change in WC (128) (134) (140) (146) (151) Cost of Equity (58%) 10.29%

FCF 1,012 1,426 1,613 1,837 2,018 WACC 7.77%

Multiples
DCF (NS) @ 7.7 % wacc .
Period Year Value NPV Enterprise Value 27,205
0 2016 1,012 1,012 EBIDTA 4140
1 2017 1,426 1,323 Multiplier 6.57
2 2018 1,613 1,389
Terminal value
3 2019 1,837 1,468 Equity Value 18,309
calculated @ 1 %
4 2020 2,018 1,496 Value per Share 61
estimated growth
5 Terminal Value 29,822 20,517 EPS 6.44
rate
27,205 Multiplier 9.41
Conclusion & Recommendations :

Proposed Deal

Outstanding Shares 302

Cash 32.86$ 9,924
Stocks CP .451 17,161
Total Proposed 27,085
P/Share 89.69
Conclusion & Recommendations :

• CP valued the company to 27 billions

CP has to approach NS • DCF Results showed 27.2 Billions
with better offer
• December 18th Offer is not tempting

NS are in a good • CP can access more value in NS because of the rail network length
negotiation position • CP needs the merging same as NS while NS can pledge on the given price

• CP should approach STB to convince them about the public interest

• STB approval initiates the post merging status
If NS Approves the • STB rejection would make NS benefit from the operational
merging
What are the
enhancement while CP can experience important drop down in
Scenarios? its share price which might not be necessarily the case of NS
• NS can draw afterwards its scheme to enhance its operating ratio
according to its internal forecast.