Canadian Pacific’s Bid for Norfolk Southern
Harvard Business School Case #216-057
HBS Courseware 9-216-712
This courseware was prepared by Professors Ben Esty and Scott Mayfield
solely as the basis for class discussion. Cases are not intended to serve as
endorsements, sources of primary data, or illustrations of effective or
ineffective management. Copyright © 2016 President and Fellows of
Harvard College. This publication may not be digitized, photocopied, or
otherwise reproduced, posted, or transmitted, without the permission of
Harvard Business School.
Table A Projected Merger Benefits ($ millions)
2016 2017 2018 2019 2020
Pre-Merger Operational Improvements
Phase-in (%) 17% 42% 67% 92% 100%
Increase in EBIT $214 $529 $844 $1,159 $1,260
Post-Merger Combination Synergies
Phase-in (%) 0% 0% 25% 50% 75%
Increase in EBIT $0 $0 $124 $248 $371
Projected Total Increase in CP-NS EBIT $214 $529 $968 $1,407 $1,631
Source: Candian Pacific Presentation, "CP's Value Proposition," December 8, 2015, p.8.
Note: The projections were on a pre-tax basis and were net of merger-related costs and other restructuring expenses.
2021
100%
$1,260
100%
$495
$1,755
structuring expenses.
Exhibit 1 Class I Railroad Operating and Financial Performance Metrics ($ millions)
Canadian Canadian Norfolk Union
BNSF National Pacific CSX Kansas City Southern Pacific
Railway Railway Railway Corp Southern Corp Corp
Operating Statistics (2014)
Miles of Track Operated (miles) 32,643 19,600 12,559 20,769 3,339 19,759 31,974
Number of Employees (number) 46,240 24,635 14,698 28,123 3,038 29,482 49,652
Carloads Originated (thousands) 9,322 5,625 2,684 5,190 443 5,137 7,771
Revenue Ton Miles (RTM) (billions) [1] 771 232 150 245 34 205 550
Productivity Measures (2014)
Revenue per RTM (cents) $2.99 $4.51 $3.81 $5.03 $4.02 $5.67 $4.36
Revenue per Employee ($000) $498 $425 $389 $439 $447 $394 $483
Carloads Origin. per Employee 202 228 183 185 146 174 157
Employees per Billion RTM 60 106 98 115 90 144 90
Million RTM per Mile of Track 24 12 12 12 10 10 17
Financial Statistics (9/30/15)
Operating Revenues $22,452 $10,126 $5,434 $12,222 $2,463 $10,863 $22,758
Operating Expenses $14,832 $5,997 $3,310 $8,482 $1,655 $7,730 $14,251
Operating Income $7,620 $4,129 $2,124 $3,740 $808 $3,133 $8,507
Operating Ratio (%) 66.1% 59.2% 60.9% 69.4% 67.2% 71.2% 62.6%
EBITDA $7,620 $5,047 $2,586 $4,926 $1,086 $4,140 $10,491
Net Income $6,218 $2,747 $1,196 $1,993 $485 $1,706 $5,086
Return on Sales (ROS) 27.7% 27.1% 22.0% 16.3% 19.7% 15.7% 22.3%
Return on Equity (ROE) 17.8% 25.4% 40.1% 17.1% 11.6% 14.1% 24.7%
Cash $3,040 $401 $493 $966 $117 $433 $1,078
Assets $81,503 $26,742 $13,759 $34,015 $8,323 $33,527 $53,763
Debt $21,882 $7,828 $6,477 $10,106 $2,345 $9,496 $13,319
Equity (book value) $34,897 $10,800 $2,980 $11,660 $4,184 $12,129 $20,599
Debt-to-Total Cap (book) 38.5% 42.0% 68.5% 46.4% 35.9% 43.9% 39.3%
Equity (market value) n/a $46,324 $23,115 $26,225 $9,915 $23,027 $75,652
Stock Price ($) n/a $58.46 $143.57 $26.90 $90.88 $76.40 $88.41
Shares Outstanding (basic) n/a 792.4 161.0 974.9 109.1 301.4 855.7
Avg. Leverage (2 year, market) n/a 12.9% 15.2% 24.1% 16.0% 24.2% 11.6%
Avg. Leverage (5 year, market) n/a 15.4% 22.4% 27.5% 16.6% 26.1% 13.3%
Interest coverage 8.7 12.5 7.7 7.0 10.6 5.9 14.2
S&P Credit Rating BBB+ A BBB+ BBB+ BBB- BBB+ A
Equity Beta (vs. S&P 500)
Two year weekly n/a 1.15 1.28 1.14 1.30 1.14 1.15
Five year monthly n/a 1.04 1.31 1.29 1.24 1.13 1.02
Ticker private CNI CP CSX KSU NSC UNP
Source: Adapted from data from Capital IQ, accessed April 2016; Association of American Railroads, Analysis of Class I
Railroads 2014, Policy and Economics department; and casewriter estimates.
Note: [1] Revenue ton miles (RTM) equals the number of tons of paid cargo times the distance hauled in miles.
Exhibit 2 Major Railroad Acquisitions and Transaction Multiples, 1995–2014
Total Enterprise Value
Acquirer Target Year EBITDA
Burlington Northern Sante Fe Pacific 1995 9x
Union Pacific Chicago Northwestern 1995 8x
Union Pacific Southern Pacific 1996 14x
Norfolk Southern & CSX Conrail 1997 14x
Canadian National Illinois Central 1998 10x
Canadian National Wisconsin Central 2001 10x
Canadian National BC Rail 2004 9x
Canadian Pacific DM&E 2008 13x
Berkshire Hathaway BNSF 2010 9x
Average 10.7x
Source: Thomas Wadewitz, Alex Johnson, and Michael Triano, UBS, Nov 10, 2015.
Note: The TEV/EBITDA multiple was based on last (trailing) twelve months (LTM) data.
Exhibit 3 Norfolk Southern Income Statements, 2011–2015 ($ millions)
Years Ended December 31 LTM [1]
2011 2012 2013 2014 Sep 2015
Operating Revenue $11,172 $11,040 $11,245 $11,624 $10,863
Operating Expenses
Compensation & benefits $2,974 $2,960 $3,002 $2,897 $2,923
Materials, services, and other $2,534 $2,463 $2,457 $2,627 $2,713
Fuel $1,589 $1,577 $1,613 $1,574 $1,087
Depreciation & amortization $862 $916 $916 $951 $1,007
Total Operating Expense $7,959 $7,916 $7,988 $8,049 $7,730
Operating Income $3,213 $3,124 $3,257 $3,575 $3,133
Interest expense $455 $495 $525 $545 $532
Unusual items $160 $129 $233 $104 $107
Profit before tax $2,918 $2,758 $2,965 $3,134 $2,708
Income tax expense $1,002 $1,009 $1,055 $1,134 $1,002
Net Income $1,916 $1,749 $1,910 $2,000 $1,706
Per Share Items
Basic Earnings per share $5.52 $5.42 $6.1 $6.44 $5.59
Dividends per share $1.66 $1.94 $2.04 $2.22 $2.34
Cash Flow Items
Capital Expenditures $2,160 $2,241 $1,971 $2,118 $2,516
Financial Ratios and Information
Revenue Growth Rate [2] 17.4% -1.2% 1.9% 3.4% -6.6%
Operating Ratio 71.2% 71.7% 71.0% 69.2% 71.2%
Effective Tax Rate 34.3% 36.6% 35.6% 36.2% 37.0%
Return on Sales (ROS) 17.2% 15.8% 17.0% 17.2% 15.7%
Number of employees 30,329 30,943 30,103 29,482 30,456
Notes:
[1] Last Twelve Months (LTM) ending September 2015.
[2] For 2015, growth rate is calculated from previous LTM ending September 2014.
Source: Adapted from data from Capital IQ, accessed April 2016.
Exhibit 4 Norfolk Southern Balance Sheets, 2011–2015 ($ millions)
Years Ended December 31 Sept
2011 2012 2013 2014 2015
Assets
Cash and ST investments $301 $668 $1,561 $973 $433
Accounts receiveable $1,022 $1,109 $1,024 $1,055 $1,103
Inventory $209 $216 $223 $236 $288
Other current assets $219 $249 $267 $514 $178
Total current assets $1,751 $2,242 $3,075 $2,778 $2,002
Net PP&E $24,469 $25,736 $26,645 $27,694 $28,682
Investments $2,234 $2,300 $2,439 $2,679 $2,740
Other LT Assets $84 $64 $324 $49 $103
Total assets $28,538 $30,342 $32,483 $33,200 $33,527
Liabilities and stock holders' equity
Accounts payable $1,092 $1,362 $1,265 $1,233 $1,160
Short-term debt $100 $200 $100 $100 $100
Current maturities of LT debt $50 $50 $445 $2 $500
Other current liabilities $459 $469 $495 $445 $607
Total current liabilities $1,701 $2,081 $2,305 $1,780 $2,367
Long-term debt $7,390 $8,432 $8,903 $8,883 $8,896
Other liabilities $2,050 $2,237 $1,444 $1,312 $1,295
Deferred income taxes $7,486 $7,832 $8,542 $8,817 $8,840
Total Liabilities $18,627 $20,582 $21,194 $20,792 $21,398
Sharholders equity $9,911 $9,760 $11,289 $12,408 $12,129
Total liabilities & equity $28,538 $30,342 $32,483 $33,200 $33,527
Financial Ratios & Other Information
Current Ratio 1.03 1.08 1.33 1.56 0.85
Debt-to-Total Capital 43.2% 47.1% 45.6% 42.0% 43.9%
S&P Long-term Debt Rating BBB+ BBB+ BBB+ BBB+ BBB+
Shares outstanding 330.1 314.5 309.7 307.4 301.4
Stock price per share 72.86 61.84 92.83 109.61 76.40
Source: Adapted from data from Capital IQ, accessed April 2016.
Note: The September figure is for the last twelve months ending September 30, 2015.
Exhibit 6 Norfolk Southern Projections on a Stand-alone Basis, October 2015 ($ millions)
Est. Projected (period ending 12/31)
2015 2016 2017 2018 2019 2020
Income statement items
Revenue $10,649 $10,698 $11,175 $11,671 $12,191 $12,557
Growth rate (%) 0.5% 4.5% 4.4% 4.5% 3.0%
Operating expenses $6,548 $6,397 $6,570 $6,808 $7,049 $7,139
Depreciation [1] $1,049 $1,091 $1,135 $1,180 $1,227 $1,300
EBIT $3,052 $3,210 $3,470 $3,683 $3,915 $4,118
Operating ratio 71% 70% 69% 68% 68% 67%
Balance sheet items
Capital expenditures $2,365 $2,070 $1,910 $1,930 $1,930 $1,949
Net working capital [2] ($192) ($128) ($134) ($140) ($146) ($151)
Source: UBS Global Research, Norfolk Southern Corporation, 10/28/15; and casewriter estimates.
Notes:
[1] Because the expected useful life of a railroad's fixed assets was very long (up to 40 years) and
depreciation was based on historical cost, the ratio of Cap Ex to Depreciation was typically greater
than one. Historically, the average ratio of Cap Ex to Depreciation for Norfolk Southern was about 1.5.
The historical ratio of Cap Ex to Depreciation of 1.5 was expected to hold during the period after 2021.
[2] The level of net working capital equals the sum of accounts receivable, inventory and other current assets
minus the sum of accounts payable and other current liabilities.
15 ($ millions)
/31)
2021
$12,871
2.5%
$7,440
$1,313
$4,118
68%
$1,969
($154)
as about 1.5.
d after 2021.
er current assets
Exhibit 7 Canadian Pacific Railway Income Statements, 2011–2015 ($ millions)
Years Ended December 31 LTM [1]
2011 2012 2013 2014 Sep 2015
Operating Revenue $5,092 $5,714 $5,773 $5,716 $5,434
Operating Expenses
Compensation & benefits $1,403 $1,479 $1,297 $1,164 $1,079
Materials, services, and other $1,304 $1,421 $1,253 $1,151 $1,125
Fuel $952 $1,002 $945 $905 $643
Depreciation & amortization $482 $541 $532 $477 $463
Total Operating Expense $4,141 $4,443 $4,027 $3,697 $3,310
Operating Income $951 $1,271 $1,746 $2,020 $2,124
Interest expense $248 $277 $262 $244 $274
Unusual items ($18) ($356) ($426) ($16) ($141)
Profit before tax $686 $638 $1,059 $1,760 $1,708
Income tax expense $125 $153 $235 $485 $512
Net Income $561 $485 $824 $1,274 $1,196
Per Share Items
Basic Earnings per share $3.31 $2.83 $4.71 $7.37 $7.27
Dividends per share $1.15 $1.35 $1.32 $1.21 $1.12
Cash Flow Items
Capital Expenditures $1,086 $1,152 $1,163 $1,251 $1,210
Financial Ratios and Information
Revenue Growth Rate [2] 1.7% 12.2% 1.0% -1.0% -8.7%
Operating Ratio 81.3% 77.8% 69.8% 64.7% 60.9%
Effective Tax Rate 18.2% 23.9% 22.2% 27.6% 30.0%
Return on Sales (ROS) 11.0% 8.5% 14.3% 22.3% 22.0%
Number of employees 14,169 14,594 14,977 14,698 14,698
Notes:
[1] Last Twelve Months (LTM) ending September 2015.
[2] For 2015, growth rate is calculated from previous LTM ending September 2014.
Source: Adapted from data from Capital IQ, accessed April 2016.
Exhibit 8 Canadian Pacific Railway Balance Sheets, 2011–2015 ($ millions)
Years Ended December 31 Sept
2011 2012 2013 2014 2015
Assets
Cash and ST investments $46 $334 $448 $195 $493
Accounts receiveable $510 $548 $546 $606 $539
Inventory $136 $136 $155 $153 $130
Other current assets $151 $315 $761 $100 $110
Total current assets $842 $1,333 $1,910 $1,054 $1,273
Net PP&E $12,544 $13,055 $12,545 $12,467 $11,766
Investments $164 $83 $87 $97 $107
Other LT Assets $330 $303 $1,483 $673 $612
Total assets $13,880 $14,775 $16,024 $14,291 $13,759
Liabilities and stock holders' equity 0.0% 0.0% 0.0% 0.0% 0.0%
Accounts payable $381 $322 $337 $351 $271
Short-term debt $27 $0 $0 $0 $0
Current maturities of LT debt $49 $54 $178 $116 $22
Other current liabilities $733 $858 $782 $752 $914
Total current liabilities $1,190 $1,234 $1,297 $1,218 $1,206
Long-term debt $4,618 $4,651 $4,377 $4,857 $6,456
Other liabilities $1,709 $1,677 $937 $1,025 $826
Deferred income taxes $1,789 $2,099 $2,733 $2,346 $2,291
Total Liabilities $9,307 $9,661 $9,343 $9,447 $10,779
Sharholders equity $4,573 $5,114 $6,680 $4,844 $2,980
Total liabilities & equity $13,880 $14,775 $16,024 $14,291 $13,759
Financial Ratios & Other Information
Current Ratio 0.71 1.08 1.47 0.87 1.06
Debt-to-Total Capital 50.7% 47.9% 40.5% 50.7% 68.5%
S&P Long-term Debt Rating BBB- BBB- BBB- BBB+ BBB+
Shares outstanding 170.4 174.2 175.2 171.0 161.0
Stock price per share 67.67 101.62 151.32 192.69 143.57
Source: Adapted from data from Capital IQ, accessed April 2016.
Note: The September figure is for the last twelve months ending September 30, 2015
Exhibit 9b Selected Stock Prices for Norfolk Southern and Canadian Pacific (in U.S. dollars)
Period Timeline NS Stock Price CP Stock Price
Beg End Event Beg End Change Beg End Change
10/01/15 - 11/06/15 $77.33 $79.87 $2.54 $146.36 $134.31 ($12.05)
11/06/15 - 11/09/15 Merger Rumors 79.87 88.62 8.75 134.31 142.18 7.87
11/09/15 - 11/17/15 88.62 86.97 (1.65) 142.18 138.58 (3.60)
11/17/15 - 11/18/15 Initial CP Offer 86.97 92.49 5.52 138.58 146.65 8.07
11/18/15 - 12/03/15 92.49 93.11 0.62 146.65 140.91 (5.74)
12/03/15 - 12/04/15 NS Rejects Offer 93.11 92.06 (1.05) 140.91 134.49 (6.42)
12/04/15 - 12/07/15 92.06 91.52 (0.54) 134.49 130.48 (4.01)
12/07/15 - 12/08/15 Revised CP Offer 91.52 86.32 (5.20) 130.48 126.13 (4.35)
12/08/15 - 12/18/15 86.32 84.27 (2.05) 126.13 125.07 (1.06)
Source: Casewriter analysis using data from the Center for Research in Security Prices, accessed April 2016.
Exhibit 11 Current Market Rates as of December 18, 2015
US Treasury Yields Corporate Bond Yields
(constant maturity) (10-year maturity)
Maturity
Yield Credit Rating Yield
6 months 0.47% AAA 2.93%
1 year 0.67% AA 3.27%
2 years 0.97% A 3.43%
3 years 1.27% BBB 4.28%
5 years 1.67% BB 6.21%
10 years 2.19% B 8.31%
30 years 2.90% CCC 18.84%
Source: Compiled from Federal Reserve, Selected Interest Rates (Daily)-H.15;
Bonds.
