Airfreight & Surface Transportation Airfreight & Logistics Market Underweight Railroads Market Weight Trucking Market Weight Truck OEMs & Suppliers Market Weight October 13, 2014 Conference Call on Rail Merger Probability Senior Transportation Analyst This report is limited solely for the use of clients of Wolfe Research. Please refer to the DISCLOSURE SECTION located at the end of this report for Analyst Certifications and Other Disclosures. For Important Disclosures, please go to www.wolferesearch.com/disclosures or write to us at Wolfe Research, LLC, 420 Lexington Avenue, Suite 648, New York, NY 10170.
Conference Call Participants Moderator Scott Group, Senior Transportation Analyst Wolfe Research Participants Lou Gitomer, Principal Law Offices of Louis E. Gitomer, LLC (rail lawyer) Michael McBride, Partner Van Ness Feldman LLP (shipper lawyer) Jeff Moreno, Partner Thompson Hine LLP (shipper lawyer) Chip Nottingham, Partner Husch Blackwell LLP (former STB Chairman) 2
CP and CSX Network Maps CP CSX Source: Company reports; Wolfe Research. 3
Size Comparison of the Major Rails BNSF CNI CP CSX NSC UNP KSU Total Revenue $22,014 $10,258 $5,964 $11,927 $11,230 $21,963 $2,369 Total Miles of Track 32,000 20,400 14,000 21,000 19,200 32,000 6,000 Source: Wolfe Research; Company reports. 4
A Rough Pro-Forma of Combined CP-CSX C14E C15E CP Revenue (CAD) $6,630 $7,457 CSX Revenue 12,485 12,977 Total Revenue (CAD) 20,350 21,117 CP Operating Expense (CAD) 4,296 4,535 CSX Operating Expense 9,043 9,192 Total Expense 14,234 14,212 CP Depreciation and Amortization (CAD) 552 583 CSX Depreciation and Amortization 1,154 1,198 Total Depreciation and Amortization 1,820 1,844 CP EBITDA 2,886 3,505 CSX EBITDA 4,595 4,982 Total EBITDA 7,936 8,749 CP EBIT 2,334 2,922 CSX EBIT 3,441 3,784 Total EBIT 6,116 6,905 CP OR 64.8% 60.8% CSX OR 72.4% 70.8% Adjusted OR 69.9% 67.3% CP Interest Income (Expense) (306) (306) CSX Interest Income (Expense) (516) (516) Total Interest Income (Expense) (873) (849) Source: Wolfe Research estimates. 5
Potential EPS Accretion for CP Assuming No Synergies CP EBIT 2,334 2,922 CSX EBIT 3,441 3,784 Total EBIT 6,116 6,905 CP OR 64.8% 60.8% CSX OR 72.4% 70.8% Adjusted OR 69.9% 67.3% CP Interest Income (Expense) (306) (306) CSX Interest Income (Expense) (516) (516) Total Interest Income (Expense) (873) (849) 100% Stock Pre-Acqusition Net Interest Expense (873) (849) Interest Expense Associated with New Debt 0 0 Total (873) (849) Estimated Synergies 0 Pretax income 5,243 6,056 Provision for income taxes 1,704 1,968 Blended weighted average tax rate 32.5% 32.5% Net income 3,539 4,088 Projected EPS C$9.55 C$11.03 Implied accretion (dilution) C$1.00 C$0.11 % of prior standalone EPS (Consensus) 11.7% 1.0% Current Consensus for CP C$8.55 C$10.92 CSX Share Price $29.94 Assumed Premium 30% Implied Equity Value for CSX ($M) 39,039 Current CP Shares Outstanding 176 New CP Shares (Assuming 50/50 NYSE/TSE) 195 Total Diluted sharecount 370 Source: Wolfe Research estimates. 6 CP EBIT 2,334 2,922 CSX EBIT 3,441 3,784 Total EBIT 6,116 6,905 CP OR 64.8% 60.8% CSX OR 72.4% 70.8% Adjusted OR 69.9% 67.3% CP Interest Income (Expense) (306) (306) CSX Interest Income (Expense) (516) (516) Total Interest Income (Expense) (873) (849) 50% Debt / 50% Stock Pre-Acqusition Net Interest Expense (873) (849) Interest Expense Associated with New Debt (781) (781) Total (1,654) (1,630) Estimated Synergies 0 Pretax income 4,462 5,275 Provision for income taxes 1,450 1,714 Blended weighted average tax rate 32.5% 32.5% Net income 3,012 3,561 Projected EPS C$11.03 C$13.03 Implied accretion (dilution) C$2.48 C$2.11 % of prior standalone EPS (Consensus) 28.9% 19.4% Current Consensus for CP C$8.55 C$10.92 CSX Share Price $29.94 Assumed Premium 30% Implied Equity Value for CSX ($M) $39,039 Current CP Shares Outstanding 176 New CP Shares (Assuming 50/50 NYSE/TSE) 97 Total Diluted sharecount 273 New Debt ($M) $19,519
Potential EPS Accretion for CP Including Synergies CP EBIT 2,334 2,922 CSX EBIT 3,441 3,784 Total EBIT 6,116 6,905 CP OR 64.8% 60.8% CSX OR 72.4% 70.8% Adjusted OR 69.9% 67.3% CP Interest Income (Expense) (306) (306) CSX Interest Income (Expense) (516) (516) Total Interest Income (Expense) (873) (849) 100% Stock Pre-Acqusition Net Interest Expense (873) (849) Interest Expense Associated with New Debt 0 0 Total (873) (849) Estimated Synergies 1,267 Pretax income 5,243 7,323 Provision for income taxes 1,704 2,380 Blended weighted average tax rate 32.5% 32.5% Net income 3,539 4,943 Projected EPS C$9.55 C$13.34 Implied accretion (dilution) C$1.00 C$2.42 % of prior standalone EPS (Consensus) 11.7% 22.2% Current Consensus for CP C$8.55 C$10.92 CSX Share Price $29.94 Assumed Premium 30% Implied Equity Value for CSX ($M) 39,039 Current CP Shares Outstanding 176 New CP Shares (Assuming 50/50 NYSE/TSE) 195 Total Diluted sharecount 370 Source: Wolfe Research estimates. 7 CP EBIT 2,334 2,922 CSX EBIT 3,441 3,784 Total EBIT 6,116 6,905 CP OR 64.8% 60.8% CSX OR 72.4% 70.8% Adjusted OR 69.9% 67.3% CP Interest Income (Expense) (306) (306) CSX Interest Income (Expense) (516) (516) Total Interest Income (Expense) (873) (849) 50% Debt / 50% Stock Pre-Acqusition Net Interest Expense (873) (849) Interest Expense Associated with New Debt (781) (781) Total (1,654) (1,630) Estimated Synergies 1,267 Pretax income 4,462 6,542 Provision for income taxes 1,450 2,126 Blended weighted average tax rate 32.5% 32.5% Net income 3,012 4,416 Projected EPS C$11.03 C$16.16 Implied accretion (dilution) C$2.48 C$5.24 % of prior standalone EPS (Consensus) 28.9% 48.0% Current Consensus for CP C$8.55 C$10.92 CSX Share Price $29.94 Assumed Premium 30% Implied Equity Value for CSX ($M) $39,039 Current CP Shares Outstanding 176 New CP Shares (Assuming 50/50 NYSE/TSE) 97 Total Diluted sharecount 273 New Debt ($M) $19,519
Historical Rail Mergers Acquirer Target Date Effective Purchase Price Trailing Revenue Trailing EBITDA EV / Revenue EV / EBITDA Union Pacific Corp Chicago and North Western Tran Jun-95 $2,645 $1,116 $311 2.4x 8.5x Burlington Northern Inc (1) Santa Fe Pacific Corp Sep-95 6,685 2,795 697 2.4x 9.6x Union Pacific Corp Southern Pacific Rail Corp Sep-96 5,344 3,159 374 1.7x 14.3x CSX / Norfolk Southern Conrail Inc Jun-97 12,532 3,722 605 3.4x 20.7x Canadian National Railway Co (2) Illinois Central Corp Jun-98 2,997 700 307 4.3x 9.8x Canadian National Railway Co (2) Wisconsin Central Transport Oct-01 1,190 372 120 3.2x 9.9x Canadian National Railway Co (2) Great Lakes Transportation LLC May-04 380 215 42 1.8x 9.1x Canadian National Railway Co (2) BC Rail Jul-04 750 223 87 3.4x 8.7x Kansas City Southern (3) TFM Apr-05 924 272 99 3.4x 9.3x Canadian Pacific (2) DM&E Railroad Sep-07 1,480 265 99 5.6x 15.0x Canadian National (2) EJ&E Railway Dec-08 300 100 20 3.0x 15.0x Berkshire Hathaway Inc. Burlington Northern Santa Fe Nov-09 43,524 14,754 5,022 2.9x 8.7x Average 3.1x 11.6x Note: (1) Burlington Northern's acquisition of Santa Fe Pacific was completed in two stages in 1995. (2) In US $. (3) Acquisition of 38.5% economic interest in TFM; Revenue and EBITDA figures represent 38.8% of TFM total amounts. Source: Wolfe Research 8
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