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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) January 31, 1996
Illinois Central Corporation
Exact name of Registrant as specified in its charter
Delaware 1-10720 13-3545405
(State or other (Commission (IRS Employer
jurisdiction of File No.) Identification No.)
incorporation)
455 North Cityfront Plaza Drive, Chicago, Illinois 60611-5504
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 755-7500
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Item 5. Other Events
Exhibit
28 Registrant's press release dated January 17, 1996.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant as duly caused this report to be signed on
its behalf by the undersigned hereto duly authorized.
ILLINOIS CENTRAL RAILROAD COMPANY
/s/JOHN V. MULVANEY
John V. Mulvaney
Controller
Date: January 31, 1996
ILLINOIS CENTRAL CORPORATION
TO BUY CCP HOLDINGS, INC.
CHICAGO -- January 17, 1996 -- Illinois Central Corporation
(NYSE:IC), whose principal subsidiary is Illinois Central
Railroad, has entered into a definitive agreement to purchase all
the stock of privately held CCP Holdings, Inc., for an enterprise
value of $139 million plus approximately $18 million of
capitalized lease obligations.
The principal subsidiaries of CCP Holdings are the Chicago, Central
& Pacific Railroad and the Cedar River Railroad. These two railroads
comprise a Class II freight system which operates 850 miles of road.
CCP's main lines run west from Chicago across Illinois and Iowa.
For purposes of comparison, CCP's preliminary 1995 results include
revenues of approximately $76 million with a 70 percent operating
ratio (operating expense divided by revenues). Illinois Central's
1995 revenues are expected to be around $640 million with an
operating ratio of less than 65 percent (actual results to be
announced January 18). As previously disclosed, under IC's standalone
growth plan (called Plan2000), IC's revenues have been projected to
grow to $800 million by year-end 1999 with an operating ratio of less
than 60 percent.
STRATEGIC OVERVIEW
Commenting on the proposed purchase, Illinois Central President and
Chief Executive Officer E. Hunter Harrison said, "CCP will provide
healthy accretion to earnings in the first full year of operation.
Moreover, CCP is additive to IC's Plan2000. By year-end 1999 we
believe CCP's own growth plus revenue synergies could be contributing
an additional $85-90 million of annual revenue to IC's growth plan.
For these reasons, we believe CCP represents an excellent investment
opportunity for IC's shareholders.
"We have discussed publicly over the last few years our willingness
to consider contiguous rail lines for potential joint venture
opportunities and/or acquisition. The CCP represents an excellent fit
for the IC, meeting our strategic, operating and financial
objectives.
"Under the very able leadership since 1987 of Chairman Donald Wood
and President and CEO Lyle Reed, CCP has been transformed into a
financially solid, well-maintained, well-run property that has
successfully expanded and diversified its customer base particularly
with respect to its two major commodities, grain and coal. In many
respects CCP's restructuring and turnaround parallels IC's own
evolution of the last six years."
IC's Chairman Gilbert H. Lamphere added, "IC's Board of Directors is
very excited about the opportunities this acquisition represents for
our shareholders. IC as a stand-alone company with its own internal
growth potential is itself a compelling story. CCP adds a high
internal rate of return through both revenue and cost synergies,
significantly enhancing earnings-per-share above our Plan2000 goals
in every year.
"With IC's cost structure, operating innovativeness and financial
discipline, IC has the wherewithal to go on the offensive in
leveraging its strengths into new markets. I have said before and say
again, I believe IC's senior management team is the best in the
industry. This is a team that thinks 'outside the box.' They are one
of IC's assets and even here we are consistently pursuing our goal
to maximize the utilization of all assets. Leveraging the talent and
proven capabilities of this senior management team over a larger
entity is just one of the many good reasons the Board finds this
acquisition compelling."
MARKET OPPORTUNITIES
CCP President and Chief Executive Officer Lyle D. Reed believes, "The
combination will bring expanded opportunities for the CCP shippers
and employees and preserve an independent originator of corn and
soybeans in its service territory. The IC is a strong, well-run
railroad with a diverse traffic mix, and I believe the addition of
CCP is a good fit."
"The marketing opportunities of the combined IC/CCP system are
exciting," said IC Senior Vice President Marketing and Sales Donald
H. Skelton. "IC is blessed with an exceptionally diverse and balanced
commodity mix of traffic. While CCP is more heavily concentrated in
two commodities, grain and coal, combining the two systems only
slightly changes IC's traditionally diverse mix of commodities.
"For example, grain represents about 14 percent of IC's revenues and would
represent about 17 percent of IC/CCP's revenues while providing regional
diversification for the combined railroads. Iowa is the number one corn
producing state, accounting for approximately 19 percent of total U.S.
production. Illinois is the second largest corn state with about 17
percent of production. Coordinating operations offers Iowa shippers
alternative singleline service to markets and ports served by the IC.
"We're bullish on the future of export grain in general and export corn
in particular over the next several years. Worldwide grain stockpiles are
at a 20-year low and will require several years to rebuild even if the
worldwide harvest each year is consistently good. IC/CCP and its customers
will be exceptionally well-positioned to benefit from this global trend.
"Moreover, IC's grain programs, including a unit-train, cycletime-
management program and a car-auction program, which have been well-
received by its own customers, have excellent potential application for
CCP's customers as well. Our experience is that better delivery systems
and good car management help our customers compete more effectively in
their existing as well as potentially new markets. When they win, we win.
"Railroad consolidation west of the Mississippi is rapidly changing the
transportation environment. The combination will preserve an independent
competitor in the corn and bean market, offering CCP's farmers a railroad
system with the size and market access to compete effectively in this
changing landscape."
Added Skelton, "Another advantage I see is that many of CCP's larger
customers are already IC customers which I believe will lead into some
very natural synergies and expansion of our current business
relationships. Plus, the single-line operation and IC's unsurpassed
interchange capability to all major U.S. and Canadian railroads enhances
industrial development potential along CCP's mainline.
"One of IC's winning strategies over the last several years has been its
willingness and ability to treat other railroads as customers in marketing
its services. Indeed, that is a continuing strategy in IC's Plan2000.
While these relationships take time to nurture and develop, they represent
potentially significant sources of revenue and can expand the effective
reach of IC into markets we do not directly serve. In the IC/CCP
combination, we will explore potential new strategic partnerships that
could be developed over time."
OPERATING OPPORTUNITIES
Senior Vice President Operations John D. McPherson commented, "Our
operating structures are compatible. Also, operating employees are
represented by the same national unions.
"CCP management's steady investment in its track is reflected in a solid
physical plant supporting a 40-m.p.h. operation. In fact, nearly all of
CCP's track was recently re-ballasted. Track and equipment have been well-
maintained and will require no extraordinary capital expenditure. Their
total annual capital expenditures in a range of $5-6 million is quite
reasonable."
McPherson noted, "On the cost side of the equation, IC's relative size
provides economies of scale with respect to both operations and
administration. Let me cite just a few examples.
"IC's car management system, in conjunction with running a disciplined
schedule of operation, has reduced cycle times, significantly improving
the availability of hoppers, boxcars and tank cars while reducing
infrastructure and equipment costs for IC and its customers. This system
will have favorable application in Iowa as well.
"Additionally, IC's fuel-efficient, lower-maintenance, highhorsepower
locomotives are very well-suited to hauling heavy grain and coal trains
efficiently and cost-effectively.
"IC's relative size also gives it superior purchasing power with respect
to fuel and other major materials and supplies that will favorably impact
CCP's unit cost structure. Plus IC's investments in state-of-the-art
technologies reduce costs for labor and material, such as IC's track-
maintenance equipment which will operate equally effectively on CCP's
physical plant.
"Increasing economies of scale work to our benefit: we can lower CCP's
unit costs while the organizational structure of the combined operation
remains relatively flat and uncomplicated for customer responsiveness and
market agility. In short, we believe we can operate the combined
properties as efficiently as we operate IC today."
McPherson added, "The two companies share a common history. We look
forward to closing this transaction and welcoming CCP back into the IC
family." (See Historical Background.)
CAPITAL STRUCTURE
IC's Chief Financial Officer Dale W. Phillips noted that the transaction
is expected to generate through purchase accounting $80 million to $90
million of Goodwill amortizable over 25 years. Phillips currently expects
to finance the transaction with a $100 million public debt offering, with
the balance coming from IC's commercial paper markets.
"We discussed this transaction with the rating agencies. The additional
debt to be issued or covered by IC does not significantly change IC's
capital structure, raising debt to capital from current levels of 45
percent to about 50 percent and slightly reducing interest coverage from
a ratio of 8.6 to 8.1," said Phillips. "That is not a significant shift,
given projected cash flows. Plus, we see opportunity for refinancing some
of CCP's debt that can take advantage of IC's strong balance sheet and
investment grade ratings."
Lamphere added, "The Board of Directors is prepared to supply capital to
support growth. As with other projects the Board is currently considering,
management's proposal to purchase CCP underwent a disciplined analysis
with respect to its internal rate of return and impact on Plan2000
earnings-per-share. On the basis of these results, we strongly believe
this acquisition will significantly contribute to shareholder value over
the short, medium and long terms."
REGULATORY APPROVAL AND TIMELINE
The transaction will require Department of Transportation (DOT)
approval. Given the relative size and the end-to-end configurations
of the railroads, IC and CCP are highly confident of obtaining prompt
regulatory approval. The purchase will not close until regulatory
approval has been obtained which is expected to take less than six
months following the filing of its application.
An approximate expected timeline of events follows:
* file purchase application with the DOT this month;
* close the transaction in the third quarter following regulatory
approval;
* begin coordinated operations in fourth quarter 1996.
Thus, 1997 will be the first full year of coordinated operation.
IC and CCP will remain separate although their operations will be
coordinated. Existing labor agreements on each property will remain
in force. No decision has been made as to which facilities may be
affected by the coordination of operations.
HISTORICAL BACKGROUND
Illinois Central Railroad today operates a 2,700-mile, Class I
freight railroad from Chicago south to the Gulf of Mexico through
Illinois, Kentucky, Tennessee, Mississippi, Louisiana and Alabama.
The Chicago, Central & Pacific Railroad operates a Class II freight
railroad from Chicago west to Omaha, Nebraska, with connecting lines
to Cedar Rapids and Sioux City, Iowa. The Cedar River Railroad runs
north from Waterloo, Iowa, to Albert Lea, Minnesota.
CCP's main lines were constructed in the 1850's and 1860's and were
incorporated into Illinois Central's system in 1867, becoming known
as IC's Iowa Division. In December 1985 the lines were sold by IC's
then-parent company for $75 million as part of a major downsizing.
Since then both IC and CCP have gone through significant
restructuring and have become financially successful railroads.
In 1989 Illinois Central changed ownership and management and today
is the industry's acknowledged leader in operating efficiency. And,
according to federal regulators, IC is the only Class I railroad
consistently earning in excess of the industry's long-term cost of
capital.
IC CONTACT: Ann G. Thoma, corporate relations, 312 755 7591. CCP
CONTACT: Lyle D. Reed, president and ceo, 319 236 9200.
