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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
(AMENDMENT NO. 2)
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SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO
SECTION 14(d)(4) OF THE SECURITIES EXCHANGE ACT OF 1934
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ILLINOIS CENTRAL CORPORATION
(NAME OF SUBJECT COMPANY)
ILLINOIS CENTRAL CORPORATION
(NAME OF PERSON(S) FILING STATEMENT)
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(TITLE OF CLASS OF SECURITIES)
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451841100
(CUSIP Number of Class of Securities)
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RONALD A. LANE, ESQ.
ILLINOIS CENTRAL CORPORATION
455 NORTH CITYFRONT PLAZA
CHICAGO, ILLINOIS 60611-5504
(312) 755-7500
(Name, address and telephone number of person authorized
to receive notices and communications on behalf
of the person filing statement)
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Copy to:
John G. Finley, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
(212) 455-2000
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This Amendment No. 2 amends and supplements the Solicitation/Recommendation
Statement on Schedule 14D-9 dated February 13, 1998 of Illinois Central
Corporation, a Delaware corporation (the "Company") with respect to the tender
offer made by Blackhawk Merger Sub, Inc., a Delaware corporation ("Purchaser"),
and a wholly-owned subsidiary of Canadian National Railway Company, a Canadian
corporation ("Canadian National"), to purchase up to 46,051,761 shares of common
stock, par value $.001 per share (the "Shares") of the Company. Capitalized
terms used herein and not otherwise defined herein shall have the meanings
ascribed to such terms in the Company's Solicitation/Recommendation Statement
dated February 13, 1998.
ITEM 2.
Item 2 is hereby amended and supplemented by adding thereto the following:
On March 2, 1998, the Company, the members of the Board of Directors of the
Company, Canadian National and Purchaser entered into a Memorandum of
Understanding (the "Memorandum of Understanding"), which was executed by counsel
for the defendants and attorneys from certain law firms representing the
plaintiffs who had filed actions in connection with the Transaction. The
Memorandum of Understanding sets forth the parties' agreement-in-principle
concerning a proposed settlement of those actions and could result in a
modification of the Merger Agreement. The Memorandum of Understanding and the
modifications to the Merger Agreement are summarized in the amendment to Item
8(c) of this Statement set forth below. A copy of Amendment No. 1 to the Merger
Agreement is filed as Exhibit (c)(18) to this amendment and is incorporated
herein by reference.
ITEM 4.
Item 4(b)(1) is hereby amended and supplemented by adding the following as
the penultimate sentence of the fourteenth paragraph:
In light of Canadian National's having informed the Company that it was not
prepared to pursue a one-step merger transaction, the Board's willingness to
approve a transaction that would result in the stock portion of the transaction
being taxable was due, in substantial part, to the combination of its desire to
minimize the risk that the value of the shares of Canadian National Common Stock
to be issued in the second-step Merger would fluctuate and Canadian National's
indication of its unwillingness to provide such value protection if the stock
consideration exceeded 30% of the aggregate transaction consideration (a
percentage level of stock consideration that is insufficient for structuring a
non-taxable transaction).
Item 4(b)(1) is hereby further amended and supplemented by adding the
following to the end of the sixteenth paragraph:
Prior to the negotiations of February 6-7, 1998, Messrs. Tellier and Sabia
had indicated that Canadian National would be willing to pay $38.00 per Share
pursuant to a structure consisting of a tender offer for 75% of the outstanding
Shares at $38.00 per Share in cash and a second-step Merger for the remaining
Shares. The number of shares of Canadian National Common Stock to be issued per
Share pursuant to the second-step merger was designed to have a value of $38.00
per Share (so long as the closing price of the Canadian National Common Stock
ranged between a collar of 7% above and 14% below the trading price of the
Canadian National Common Stock on the day prior to the announcement of the
Transaction). While Messrs. Lamphere and Lynch had expressed receptivity to such
a structure, they indicated that they were seeking $39.00 per Share on behalf of
the Company's stockholders. At the meeting on Friday, February 6, Mr. Tellier
explained that the high-end range of the collar that had previously been
discussed between representatives of Canadian National and the Company needed to
be increased to 15% (rather than 7%) above the Canadian National Common Stock
per share closing price that Friday ($56.00 per Share) in order to provide
additional protection that the Offer would not fail merely because the Company's
stockholders were incentivized to participate in the back-end Merger as a result
of the Canadian National Common Stock outstripping the high end of the collar.
He also stated, however, that Canadian National was willing to maintain the
asymmetrical features of the collar previously discussed by increasing the
downside range of the collar protection to 23% (rather than 14%). On Saturday,
February 7, Messrs. Lamphere and Lynch responded that the per Share price to be
received by the Company's stockholders would need to be increased to $39.50 as a
result of Canadian National's desire to increase the top end of the range of the
collar. After further negotiations which reflected, among other things, Mr.
Tellier's statement that Canadian National was not prepared to pay more than
$39.00 per share, the parties tentatively agreed to a price of $39.00 per Share
and a structure that
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included an asymmetrical collar that fixes the value of the shares of Canadian
National Common Stock to be issued in the second-step Merger at $39.00 so long
as the CN Average Closing Price (as defined in the Merger Agreement) is between
$43.00 (23% below the price of Canadian National Common Stock on the last
trading day prior to the announcement of the Transaction) (subject to adjustment
as set forth in Item 8(c)) and $64.50 (15% above the price of Canadian National
Common Stock on the last trading day prior to the announcement of the
Transaction). The parties also completed negotiations on alternative transaction
structures in the event the Minimum Condition (as defined in the Merger
Agreement) to the Offer was not satisfied (as described in more detail in Item
13 of the initial Offer to Purchase dated February 13, 1998), including the
obligation of Canadian National to either (i) convert the Offer into a tender
offer for all outstanding Shares at $39.00 per Share in cash and modify the
consideration to be paid in the second step Merger to $39.00 per share in cash
or (ii) terminate the Offer and proceed with a one step Merger, subject to a
stockholder vote (with the same form and amount of aggregate consideration as
contemplated in the Merger Agreement if the Minimum Condition had been
satisfied).
ITEM 8.
Item 8(a) is hereby amended and supplemented by replacing Item 8(a) with
the following:
(a) Appraisal Rights.
In accordance with the United States Supreme Court decision in Schwabacher
v. United States, 334 U.S. 182 (1948), stockholders of the Company will not have
any appraisal or like rights under state law, even if they were otherwise
available under state law, unless the STB or a court of competent jurisdiction
determines that state law appraisal rights are available to holders of Shares.
In addition, if Canadian National purchases 46,051,761 Shares pursuant to
the Offer, holders of the Shares will not be entitled to appraisal rights under
Delaware Law in connection with the Merger because (i) the Shares are listed on
the New York Stock Exchange ("NYSE") and (ii) the holders of Shares will have
their Shares converted in the Merger into the right to receive shares of
Canadian National Common Stock, which will also be listed on the NYSE, and cash
in lieu of fractional shares.
Item 8(c) is hereby amended and supplemented by replacing Item 8(c) with
the following:
(c) Litigation.
Following the announcement of the Transaction, the following litigation (as
previously disclosed) was filed:
Jay Spinner, Plaintiff, against George D. Gould, Alexander P. Lynch, F. Jay
Taylor, E. Hunter Harrison, Samuel F. Pryor, IV, Alan H. Washkowitz, William B.
Johnson, Gilbert H. Lamphere, John V. Tunney and Illinois Central Corp., C.A.
No. 16184-NC (Del. Ch. Ct., New Castle County). On February 11, 1998, an alleged
owner of the common stock of the Company filed a "Class Action Complaint" in the
Court of Chancery of the State of Delaware against the Company and members of
its Board of Directors arising out of the Company's announcement that it had
reached an agreement to be acquired by Canadian National. Although the body of
the complaint purports to list Canadian National as a defendant, Canadian
National is not listed as a defendant in the caption of the complaint. The
complaint alleges, inter alia, that the individual defendants breached fiduciary
duties allegedly owed to public shareholders of the Company by, among other
things, not adequately evaluating the value of the Company or the terms of the
transaction contemplated by the Offer before approving its terms. The Plaintiff
brings the action on behalf of a reputed class of all common stockholders of the
Company (except the defendants and any person, firm, trust, corporation, or
other entity related to or affiliated with any of the defendants) and their
successors in interest, who are or will be threatened with injury allegedly
arising from defendants' actions as alleged in the complaint. The plaintiff
alleges that he and members of the reputed class will suffer damages if they
receive the Offer consideration, which the complaint characterizes as unfair and
inadequate. The plaintiff has demanded judgment: (1) declaring, inter alia, that
the initiated action is a proper class action, (2) enjoining or rescinding the
transaction contemplated by the Offer, and (3) requiring the Board of Directors
of the Company to place the Company up for auction and/or conduct a market
check.
Susan Regan, Plaintiff, against George D. Gould, Alexander P. Lynch, F. Jay
Taylor, E. Hunter Harrison, Samuel F. Pryor, IV, Alan H. Washkowitz, William B.
Johnson, Gilbert H. Lamphere, John V. Tunney, Illinois Central Corporation,
Blackhawk Merger Sub, Inc. and Canadian National Railway Co.,
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Defendants, C.A. No. 16191-NC (Del. Ch. Ct., New Castle County). On February 13,
1998, an alleged owner of the common stock of the Company filed a "Class Action
Complaint" in the Court of Chancery of the State of Delaware against the Company
and the members of its Board of Directors, Purchaser, and Canadian National,
arising out of the Company's announcement that it had reached an agreement to be
acquired by Canadian National. The complaint alleges, inter alia, that the
individual defendants breached fiduciary duties allegedly owed to public
shareholders of the Company by, among other things, not adequately evaluating
the value of the Company or the terms of the transaction contemplated by the
Offer before approving its terms. The complaint alleges that Canadian National
and Purchaser aided and abetted the Individual Defendants' alleged breaches of
fiduciary duties. The plaintiff brings the action on behalf of a reputed class
of all common stockholders of the Company (except the defendants and any person,
firm, trust, corporation, or other entity related to or affiliated with any of
the defendants) and their successors in interest, who are or will be threatened
with injury allegedly arising from defendants' actions as alleged in the
complaint. The plaintiff alleges that she and members of the reputed class will
suffer damages if they receive the Offer consideration, which the complaint
characterizes as unfair and inadequate. The plaintiff has demanded judgment: (1)
declaring, inter alia, that the initiated action is a proper class action, (2)
enjoining or rescinding the transaction contemplated by the Offer, and (3)
requiring the Board of Directors of the Company to place the Company up for
auction and/or conduct a market check.
Carlton Harris, Susan Harris, and A.F. Pearlman on behalf of themselves and
all others similarly situated, Plaintiffs v. Illinois Central Corporation,
Gilbert Lamphere, E. Hunter Harrison, Samuel F. Pryor, IV, George D. Gould,
Alexander P. Lynch, F. Jay Taylor, Alan H. Washkowitz, William B. Johnson, and
John V. Tunney, Defendants, C.A. No. 16188-NC (Del. Ch. Ct., New Castle County).
On February 13, 1998, three alleged owners of the Common Stock of the Company
filed a "Class Action Complaint" in the Court of Chancery of the State of
Delaware against the Company and the members of its Board of Directors, arising
out of the Company's announcement that it had reached an agreement to be
acquired by Canadian National. The complaint alleges, inter alia, that the
individual defendants breached fiduciary duties allegedly owed to shareholders
of the Company by, among other things, not adequately evaluating the value of
the Company or the terms of the transaction contemplated by the Offer before
approving its terms. The complaint also alleges that certain defendants acted
under a conflict of interest and engaged in self-dealing. The plaintiff brings
the action on behalf of a reputed class of all shareholders of the Company
(except the defendants and any affiliated or related persons or entities,
predecessors or successors in interest). The plaintiffs allege that they and
members of the reputed class will suffer damages if they receive the Offer
consideration, which the complaint characterizes as unfair and inadequate. The
plaintiffs have demanded judgment: (1) declaring, inter alia, that the initiated
action is a proper class action, (2) enjoining the transaction contemplated by
the Offer, and (3) ordering the defendants to carry out their fiduciary duties
to plaintiffs and the reputed class. On February 27, 1998, Carlton Harris and
Susan Harris withdrew from this action as plaintiffs.
Susan Regan, Plaintiff, against George D. Gould, Alexander P. Lynch, F. Jay
Taylor, E. Hunter Harrison, Samuel F. Pryor, IV, Alan H. Washkowitz, William B.
Johnson, Gilbert H. Lamphere, John V. Tunney, Illinois Central Corp. and
Blackhawk Merger Sub, Inc., Defendants, Civil Action No. 98CH01972 (Ill. Cir.
Ct., Chancery Div., Cook County). On or about February 13, 1998, an alleged
owner of the common stock of the Company filed a "Class Action Complaint" in the
Court of Chancery of the State of Illinois against the Company and the members
of its Board of Directors, and Purchaser, arising out of the Company's
announcement that it had reached an agreement to be acquired by Canadian
National. Although it is named as a defendant, there are no allegations against
Purchaser in the complaint. The complaint alleges, inter alia, that the
individual defendants breached fiduciary duties allegedly owed to public
shareholders of the Company by, among other things, not adequately evaluating
the value of the Company or the terms of the transaction contemplated by the
Offer before approving its terms. The plaintiff brings the action on behalf of a
reputed class of all common stockholders of the Company (except the defendants
and any person, firm, trust, corporation, or other entity related to or
affiliated with any of the defendants) and their successors in interest, who are
or will be threatened with injury allegedly arising from defendants' actions as
alleged in the complaint. The plaintiff alleges that she and members of the
reputed class will suffer damages if they receive the Offer consideration, which
the complaint characterizes as unfair and inadequate. The plaintiff has demanded
judgment: (1) declaring, inter alia, that the initiated action is a proper class
action, (2) enjoining or rescinding
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the transaction contemplated by the Offer, and (3) requiring the Board of
Directors of the Company to place the Company up for auction and/or conduct a
market check.
On March 2, 1998, the parties to the litigation listed above entered into a
Memorandum of Understanding (the "Memorandum of Understanding") which was signed
by counsel for the defendants and attorneys from certain law firms representing
the plaintiffs in those actions. The Memorandum of Understanding sets forth the
parties' agreement-in-principle concerning a proposed settlement of those
actions.
Among other things, the Memorandum of Understanding provides that upon, and
only upon, "Final Court Approval" (as that term is defined in the Memorandum of
Understanding) of the proposed settlement and other conditions summarized below,
(i) the definition of "CN Average Closing Price" set forth in Section 2.02(c) of
the Merger Agreement will be amended to provide that if such average closing
price is less than $41.50 then the CN Average Closing Price shall be $41.50 ;
and (ii) Canadian National shall agree that, if the Surface Transportation Board
shall have issued written notice disapproving the acquisition of control of the
Company by Canadian National or advised Canadian National of such a
determination or imposed unacceptable conditions on such acquisition of control,
and there is a subsequent disposition of the Shares in the Voting Trust,
Canadian National shall distribute, or cause to be distributed, to stockholders
of the Company who received payment for their Shares pursuant to the Offer and
to record holders at the Effective Time of the Merger, their pro rata share of
one-third of any net profits realized upon any disposition of Shares by or out
of the Voting Trust (after deducting, inter alia, the fees and expenses,
including legal and advisory fees and expenses, associated with the acquisition
and disposition of such Shares, the cost of carrying the Shares between the
acquisition and disposition of such Shares and certain taxes relating to the
acquisition, ownership and disposition of such Shares). As defined in the
Memorandum of Understanding, "Final Court Approval" of the proposed settlement
means that the Delaware Court of Chancery has entered an order approving the
settlement and that such order is finally affirmed on appeal or is no longer
subject to appeal and the time for any petition for reargument, appeal or
review, by certiorari or otherwise, has expired. AS INDICATED ABOVE, THESE
PROVISIONS WILL BECOME EFFECTIVE ONLY UPON FINAL COURT APPROVAL OF THE PROPOSED
SETTLEMENT WHICH MAY NEVER BE OBTAINED.
The Memorandum of Understanding also provides for, among other things, (i)
the dissemination to the record holders of the Company of the supplemental
disclosure set forth below, (ii) the certification, for settlement purposes
only, of a mandatory non-opt-out class, (iii) the complete discharge and
dismissal with prejudice of any claims that were, or could have been, or in the
future might have been asserted in the actions, (iv) the release of the
defendants and others and (v) the defendants' agreement that they will not
oppose an application by plaintiffs' counsel for an award of fees and expenses
not to exceed, in the aggregate, $950,000. The Memorandum of Understanding shall
be null and void and of no force and effect if plaintiffs' counsel determine
that the settlement is not fair and reasonable.
The parties to the Memorandum of Understanding contemplate submitting
filings to the Delaware Court of Chancery seeking certification of a settlement
class, final approval of the terms of the settlement upon notice in form
approved by that Court, and dismissal with prejudice of the actions. The
agreements-in-principle in the Memorandum of Understanding are subject to a
number of conditions including, among others, (i) 50.1% of the Shares (on a
fully diluted basis) having been acquired by Canadian National and placed in the
Voting Trust, (ii) the dismissal of the Illinois action, (iii) drafting and
execution of definitive settlement documents and the other agreements necessary
to effectuate the terms of the proposed settlement, (iv) completion by
plaintiffs of appropriate discovery in the actions, and (v) Final Court
Approval. The Memorandum of Understanding is filed as an exhibit to Amendment
No. 1 to the Schedule 14D-1 and is incorporated herein by reference, and the
foregoing summary of the Memorandum of Understanding is qualified in its
entirety by reference thereto.
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As stated above, pursuant to the Memorandum of Understanding, the Company
has agreed to provide the following additional disclosure regarding the analysis
undertaken by The Beacon Group Capital Services, LLC ("Beacon") and Lehman
Brothers Inc. ("Lehman"):
OPINION OF THE BEACON GROUP CAPITAL SERVICES, LLC
Beacon acted as financial advisor to the Company in connection with the
Offer and the Merger. On February 10, 1998, Beacon rendered its written opinion
(the "Beacon Opinion") to the effect that, as of such date and based upon the
assumptions made, matters considered and limits of the reviews undertaken by
Beacon set forth in the Beacon Opinion, the consideration to be received by the
holders of Shares pursuant to the Offer and the Merger, considered as a unitary
transaction, was fair from a financial point of view to such holders.
THE FULL TEXT OF THE BEACON OPINION IS ATTACHED HERETO AS ANNEX A. THE
BEACON OPINION IS ADDRESSED TO THE BOARD OF DIRECTORS OF THE COMPANY AND DOES
NOT ADDRESS THE MERITS OF THE UNDERLYING DECISION OF THE COMPANY TO ENGAGE IN
THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY HOLDER OF SHARES AS TO HOW SUCH HOLDER SHOULD RESPOND TO
THE OFFER OR VOTE ON THE MERGER OR AS TO ANY OTHER MATTER IN CONNECTION WITH THE
OFFER AND THE MERGER. THE SUMMARY OF THE BEACON OPINION SET FORTH IN THIS
STATEMENT ON SCHEDULE 14D-9 IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF THE BEACON OPINION ATTACHED HERETO AS ANNEX A. HOLDERS OF SHARES
ARE URGED TO READ THE BEACON OPINION IN ITS ENTIRETY FOR THE PROCEDURES
FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND QUALIFICATIONS AND
LIMITATIONS OF THE REVIEW UNDERTAKEN BY BEACON IN CONNECTION THEREWITH.
In connection with the Beacon Opinion, Beacon reviewed, among other things:
(i) the Merger Agreement, (ii) Annual Reports to stockholders and Annual Reports
on Form 10-K of the Company for the five years ended December 31, 1996, (iii)
certain interim reports to stockholders of the Company and Quarterly Reports on
Form 10-Q of the Company, (iv) certain other communications from the Company to
its stockholders, (v) certain internal financial analyses and forecasts for the
Company prepared by the Company's management, (vi) Annual Reports to
shareholders and Annual Reports on Form 40-F of Canadian National for the two
years ended December 31, 1996, (vii) the Prospectus issued by Canadian National
in connection with its initial public offering on November 17, 1995, (viii)
certain interim reports to stockholders of Canadian National and Quarterly
Reports on Form 6-K of Canadian National, (ix) certain other communications from
Canadian National to its stockholders, and (x) certain internal financial
analyses and forecasts for Canadian National prepared by Canadian National's
management. In addition, Beacon held discussions with members of the senior
management of Canadian National and the Company regarding the past and current
business operations, financial condition and future prospects of their
respective companies. Beacon also considered the views of senior management of
the Company and Canadian National regarding the strategic importance of, and
potential synergies expected to be realized from, the Merger. In addition,
Beacon reviewed the reported price and trading activity for the Shares and
shares of Canadian National Stock, compared certain financial and stock market
information for the Company and Canadian National with similar information for
certain other companies the securities of which are publicly traded, reviewed
the financial terms of certain recent business combinations in the railroad
industry and performed such other studies and analyses as Beacon considered
appropriate.
In preparing the Beacon Opinion, Beacon assumed and relied without
independent verification upon the accuracy and completeness of all of the
financial and other information reviewed by Beacon for purposes of the Beacon
Opinion. Beacon did not make an independent evaluation or appraisal of the
assets and liabilities of the Company or Canadian National or any of their
respective subsidiaries, and Beacon was not furnished with any such evaluation
or appraisal. Beacon's advisory services and the Beacon Opinion were provided
for the information and assistance of the Board of Directors of the Company in
connection with its consideration of the transactions contemplated by the Merger
Agreement, and the Beacon Opinion does not constitute a
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recommendation to any stockholder as to how such stockholder should respond to
the Offer or vote on the Merger. The Beacon Opinion is necessarily based on
economic, market, financial and other conditions as they existed on, and could
be evaluated as of, the date of the Beacon Opinion. In arriving at the Beacon
Opinion, Beacon was not authorized to solicit, and did not solicit, interest
from any party with respect to a business combination involving the Company. No
limitations were imposed by the Company on the scope of Beacon's investigation
or the procedures to be followed by Beacon in rendering the Beacon Opinion.
Set forth below is a brief summary of certain of the material financial
analyses presented by Beacon to the Board of Directors of the Company on
February 8 and February 10, 1998 in connection with the Beacon Opinion.
Comparable Public Company Analysis. Beacon reviewed and compared certain
financial information and public market multiples for the Company to
corresponding financial information and public market multiples for selected
publicly traded companies in the railroad industry considered by Beacon to be
reasonably comparable to the Company for purposes of this analysis. Such
comparable companies consisted of: Canadian National, Burlington Northern Santa
Fe Corporation, CSX Corporation, Kansas City Southern Industries, Inc., Norfolk
Southern Corporation and Union Pacific Corporation (the "Comparable Companies").
Using publicly available information, Beacon calculated and analyzed, among
other things, (i) the Equity Value (as defined below) of the Comparable
Companies and the Company as a multiple of certain historical and projected
financial criteria (including net income and book value), (ii) the Aggregate
Value (as defined below) of the Comparable Companies and the Company as a
multiple of the latest twelve months' ("LTM") sales, earnings before interest,
taxes, depreciation and amortization ("EBITDA"), earnings before interest and
taxes ("EBIT") and Tangible Net Capital Employed (as defined below), and (iii)
the LTM Operating Ratio (as defined below) of the Comparable Companies and the
Company. The "Equity Value" of each company was obtained by multiplying the
number of shares of common stock outstanding for each company by the closing
price of such company's common shares on the New York Stock Exchange on February
6, 1998, as adjusted to include the impact, if any, of outstanding options. The
"Aggregate Value" of each company was obtained by adding the Equity Value of the
company to such company's Net Debt (as defined below). The "Net Debt" of each
company was obtained by adding such company's debt, preferred stock and minority
interest and subtracting cash and cash equivalents. The "Tangible Net Capital
Employed" of each company was obtained by adding the tangible book value of the
company to such company's Net Debt. The "Operating Ratio" of a company is
expressed as the percentage obtained by calculating the ratio that the operating
expenses of a company bear to the revenues of such company. The projected net
income data for the Company and each Comparable Company was based on information
provided by Zacks Investment Research Inc. Beacon focused on EBITDA multiples in
its presentation because the difference in depreciation conventions between the
Company and the Comparable Companies (the Company has lower depreciation as a
percentage of revenues than the Comparable Companies primarily due to
acquisition accounting) makes EBITDA the most comparable operating statistic,
since the Company's EBIT and net income figures are not burdened with a similar
depreciation load. This analysis indicated that, with respect to the Comparable
Companies (excluding Union Pacific Corporation and Kansas City Southern
Industries, Inc. because a large proportion of Kansas City Southern's results
are contributed by its financial services subsidiaries and because of the
significant operational problems encountered by Union Pacific during the last
twelve months), Aggregate Value as a multiple of LTM EBITDA of the Comparable
Companies ranged from 6.6x to 9.1x, with a mean of 7.6x and a median of 7.2x, as
compared to an Aggregate Value as a multiple of LTM EBITDA of the Company of
9.2x.
Comparable Transactions Analysis. Using publicly available information,
Beacon reviewed and analyzed selected merger and acquisition transactions
involving other companies in the railroad industry (the "Comparable
Transactions") and derived certain financial ratios which it compared with like
financial ratios for the Offer and the Merger, considered as a unitary
transaction. In reviewing and presenting this data Beacon noted that the merger
and acquisition transaction environment varies over time because of
macroeconomic factors (such as interest rate and equity market fluctuations) and
microeconomic factors (such as industry results and growth expectations) and
that no transaction reviewed was identical to the Offer and the Merger,
considered as a unitary transaction, and that, accordingly, an assessment of the
results of the Comparable
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Transactions analysis necessarily involves considerations and judgments
concerning differences in financial and operating characteristics of the Company
and other factors that would affect the acquisition value of the companies to
which it is being compared. The Comparable Transactions consisted of: Conrail
Inc./CSX Corporation and Norfolk Southern Corporation, Southern Pacific Rail
Corporation/Union Pacific Corporation, Santa Fe Pacific Corporation/Burlington
Northern Inc., Chicago and North Western Transportation Company/Union Pacific
Corporation and MidSouth Corporation/Kansas City Southern Industries, Inc. For
the Comparable Transactions and the Offer and the Merger, considered as a
unitary transaction, Beacon, among other things, compared (i) the Transaction
Equity Value (as defined below) of the acquired companies and the Company as a
multiple of LTM net income and book value and (ii) the Transaction Aggregate
Value (as defined below) of the acquired companies and the Company as a multiple
of the LTM revenue, EBIT and EBITDA. The "Transaction Equity Value" of each
acquired company and the Company was obtained by multiplying the number of
shares of common stock outstanding for each company by the aggregate
consideration payable per share of common stock in each Comparable Transaction
and in the Offer and the Merger, considered as a unitary transaction, as
adjusted to include the impact, if any, of outstanding options. The "Transaction
Aggregate Value" of each acquired company and the Company was obtained by adding
the Transaction Equity Value of each company to such company's Net Debt. Beacon
focused on the Transaction Aggregate Value as a multiple of the Company's LTM
EBITDA for the reasons set forth above. This analysis indicated that, with
respect to the Comparable Transactions, Transaction Aggregate Value as a
multiple of LTM EBITDA of the acquired companies ranged from 7.7x to 12.3x
(which multiple was for the Conrail transaction), with a mean of 8.7x and a
median of 8.5x, as compared to the Transaction Aggregate Value as a multiple of
the Company's calendar 1997 EBITDA of 9.8x (based on the assumption that the
aggregate consideration per share for the Shares is equal to $39.00). Beacon did
not include the multiples paid in the Conrail transaction as a comparable
transaction for purposes of calculating the mean and median because of the
contested nature of the bidding between CSX and Norfolk Southern with respect to
Conrail and the substantial projected synergies with respect to that
transaction.
Discounted Cash Flow Analyses. Beacon performed discounted cash flow
analyses of the projected unlevered free cash flows of the Company (defined as
cash flow available after working capital, capital spending and tax
requirements) for the period 1998 through 2002 using both the terminal multiple
and perpetuity methods. Beacon based these analyses on (i) financial forecasts
provided to Beacon by the management of the Company (the "Company Management
Case Forecasts") and (ii) financial forecasts developed by Beacon from publicly
available Company earnings estimates prepared by the investment community (the
"Wall Street Case Forecasts"). Applying discount rates ranging from 10.0% to
11.0% and terminal value multiples of estimated EBITDA in 2002 ranging from 7.0x
to 8.0x, Beacon calculated the implied equity value per Share to range from
$34.15 to $40.57 per Share for the Company Management Case Forecasts and to
range from $32.27 to $38.42 per Share for the Wall Street Case Forecasts.
Utilizing such forecasts with the perpetuity method and applying discount rates
ranging from 10.0% to 11.0% and perpetuity growth rates ranging from 2.5% to
3.5%, Beacon calculated the implied equity value per Share to range from $29.18
to $39.15 per Share for the Company Management Case Forecasts and to range from
$27.15 to $36.57 per Share for the Wall Street Case Forecasts.
Pro Forma Merger Analysis. Beacon analyzed the estimated pro forma effect
of the Offer and the Merger, considered as a unitary transaction, on the
earnings per share of Canadian National. In this analysis, Beacon assumed (i)
that the aggregate consideration payable per Share in the Offer and the Merger,
considered as a unitary transaction, would be equal to $39.00, (ii) the
consideration payable per Share in the Offer and the Merger, considered as a
unitary transaction, will be paid 75% in cash and 25% in shares of Canadian
National common stock, and (iii) a per share price for shares of Canadian
National common stock equal to $56.00 (the closing market price on February 6,
1998). In addition, the financial forecasts for the combined company resulting
from the consummation of the Offer and the Merger which were used by Beacon in
its analysis were based upon (i) the Company Management Case Forecasts combined
with financial forecasts for Canadian National provided to Beacon by the
management of Canadian National and an estimate of synergies prepared by the
management of the Company (the "Company-Canadian National Forecasts and
Synergies") and (ii) the Wall Street Case Forecasts combined with financial
forecasts for Canadian National provided to Beacon by the management of Canadian
National and an estimate of synergies
8
<PAGE> 9
prepared by the management of Canadian National (the "Wall Street-Canadian
National Forecasts and Synergies").
Based on its analysis and the assumptions set forth above, Beacon estimated
that, on an estimated earnings per share basis, (i) based on the
Company-Canadian National Forecasts and Synergies, the Offer and the Merger,
considered as a unitary transaction, would have accretive effects on the
earnings per share of Canadian National of 7.0% in 1998, 14.1% in 1999, 13.8% in
2000, 15.1% in 2001 and 11.2% in 2002, and (ii) based on the Wall
Street-Canadian National Forecasts and Synergies, the Offer and the Merger,
considered as a unitary transaction, would have accretive or dilutive effects,
as applicable, on the earnings per share of Canadian National of (3.7%) in 1998,
2.4% in 1999, 3.9% in 2000, 7.4% in 2001 and 6.9% in 2002. In addition, based on
its analysis and the assumptions set forth above, Beacon estimated that, on an
estimated "cash" earnings per share basis (i.e., excluding amortization impact
of goodwill and capitalized expenses associated with the Offer and the Merger,
considered as a unitary transaction), (i) based on the Company-Canadian National
Forecasts and Synergies, the Offer and the Merger, considered as a unitary
transaction, would have accretive effects on the earnings per share of Canadian
National of 18.5% in 1998, 24.3% in 1999, 22.7% in 2000, 23.1% in 2001 and 18.5%
in 2002, and (ii) based on the Wall Street-Canadian National Forecasts and
Synergies, the Offer and the Merger, considered as a unitary transaction, would
have accretive effects on the earnings per share of Canadian National of 7.8% in
1998, 12.7% in 1999, 12.8% in 2000, 15.4% in 2001 and 14.2% in 2002. The
financial forecasts that underlie this analysis are subject to substantial
uncertainty and, therefore, actual results may be substantially different.
Leveraged Buyout Analysis. Beacon performed a leveraged buyout analysis to
determine the potential implied equity value per Share that might be achieved in
the acquisition of the Company in a leveraged buyout transaction based upon
current market conditions. To conduct this analysis, Beacon utilized the Company
Management Case Forecasts and assumed (i) a $1.4 billion senior debt facility,
(ii) $300 million of subordinated debt, (iii) an equity investment with internal
rate of return expectations of approximately 20% and (iv) terminal year EBITDA
exit multiples ranging from 7.0x to 8.0x. At a representative price per Share
equal to $34.00 (which implies a total equity investment of $993 million), this
analysis indicated five year equity returns ranging from 18.2% to 22.8%.
The information above is a brief summary of certain of the material
financial analyses presented by Beacon to the Board of Directors of the Company
on February 8 and February 10, 1998 in connection with the Beacon Opinion. This
summary does not purport to be a complete description of the analyses performed
by Beacon in connection with the rendering of the Beacon Opinion. The
preparation of a fairness opinion is a complex process and is not susceptible to
partial analysis or summary description. Beacon believes that its analyses must
be considered as a whole and that selecting portions of its analyses, without
considering all factors and analyses, would create an incomplete view of the
process underlying the Beacon Opinion. In addition, Beacon considered the
results of every portion of its analysis and did not assign relative weights to
any portion of its analysis, so that the ranges of valuations resulting from any
particular analysis described above should not be taken to be Beacon's view of
the actual value of the Company, which may be significantly more or less
favorable than as set forth herein. The fact that any specific analysis has been
referred to in the summary above is not meant to indicate that such analysis was
given more weight than any other analyses.
In performing its analyses, Beacon made numerous assumptions with respect
to industry performance, general business and economic conditions, and other
matters, many of which are beyond the control of the Company or Canadian
National. The analysis performed by Beacon is not necessarily indicative of
actual values, trading values or actual future results that might be achieved,
all of which may be significantly more or less favorable than suggested by such
analysis. No public company utilized as a comparison is identical to the Company
and none of the Comparable Transactions or other business combinations utilized
as a comparison is identical to the transactions contemplated by the Merger
Agreement. Accordingly, an analysis of publicly traded comparable companies and
comparable business combinations resulting from the Comparable Transactions is
not mathematical; rather such analysis involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the comparable companies or the company, or transaction, and other factors that
could affect the public trading values of such comparable companies or company
to which they are being compared. In connection with its analyses, Beacon
utilized estimates and
9
<PAGE> 10
forecasts of future operating results and estimated synergies provided by the
respective managements of the Company and Canadian National. Analyses based upon
forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such analyses. Because such analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of the Company
and Canadian National, none of Beacon, the Company or Canadian National assumes
responsibility if future results or actual values are materially different from
these forecasts or assumptions. Such analyses were prepared solely as part of
Beacon's analysis of the fairness, from a financial point of view, of the
consideration to be received by the holders of Shares pursuant to the Offer and
the Merger, considered as unitary transaction, and were provided to the
Company's Board of Directors in connection with the delivery of the Beacon
Opinion. Beacon's analysis does not purport to be an appraisal or to reflect the
prices at which a company might actually be sold or the prices at which any
securities may be traded in the future. In addition, as described elsewhere in
this Statement on Schedule 14D-9, the Beacon Opinion was one of many factors
taken into consideration by the Company's Board of Directors in making its
determination to approve the Offer, the Merger and the Merger Agreement.
Consequently, the analysis described above should not be viewed as determinative
of the opinion of either the Board of Directors or management of the Company
with respect to the value of the Company or a combination of the Company with
Canadian National or whether either the Board of Directors or management of the
Company would have been willing to agree to different terms for the Offer and
the Merger.
Pursuant to a letter agreement dated December 31, 1997, the Company paid
Beacon a non-refundable retainer of $250,000 and, upon the execution of the
Merger Agreement, the Company has agreed to pay Beacon a fee in the amount of
$2,000,000. The Company has also agreed to pay Beacon a fee in the amount of
$10,000,000 if the Merger or a similar transaction is consummated during (i) the
term of Beacon's engagement by the Company or (ii) the twenty four month period
commencing on the date, if any, of the termination of Beacon's engagement under
such letter agreement. The Company has also agreed to reimburse Beacon for its
out-of-pocket expenses, including all reasonable fees and disbursements of
counsel, and to indemnify Beacon and certain related persons against certain
liabilities in connection with their engagement, including certain liabilities
under the federal securities laws arising out of their engagement.
As part of its investment banking business, Beacon is continually engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, financings, private placements, principal investments and
other purposes. Beacon is familiar with the Company, with certain professionals
of Beacon having previously been affiliated with an entity which acted as the
Company's financial advisor from time to time, including in connection with the
Company's acquisition of CCP Holdings, Inc. in 1996. During 1997, approximately
$500,000 was paid by the Company to Beacon for financial advisory services
rendered. Alexander P. Lynch, a managing director of Beacon, has been a director
of the Company since 1989 and is the owner of 125,683 Shares. Mr. Lynch has
entered into a binding agreement with Canadian National pursuant to which Mr.
Lynch has agreed to convert all options to acquire Shares into options to
acquire shares of Canadian National Common Stock.
OPINION OF LEHMAN
The Board of Directors of the Company engaged Lehman to render an opinion
to the Board as to the fairness, from a financial point of view, to the
Company's stockholders of the consideration to be received by such stockholders
in the Offer and Merger, taken together.
On February 10, 1998, Lehman delivered its oral opinion to the Board
(subsequently confirmed in writing as of such date) to the effect that as of
such date the consideration to be received by the stockholders of the Company in
the Offer and the Merger in the Transaction, taken together, is fair to such
stockholders from a financial point of view.
THE FULL TEXT OF LEHMAN'S WRITTEN OPINION DATED FEBRUARY 10, 1998 IS
ATTACHED HERETO AS ANNEX A (THE "LEHMAN OPINION") AND IS INCORPORATED HEREIN BY
REFERENCE. STOCKHOLDERS MAY READ THE LEHMAN OPINION FOR A DISCUSSION OF
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY
LEHMAN
10
<PAGE> 11
IN RENDERING ITS OPINION. THE SUMMARY OF THE LEHMAN OPINION SET FORTH IN THIS
STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION.
No limitations were imposed by the Company on the scope of Lehman's
investigation or the procedures to be followed by Lehman in rendering its
opinion, except that the Company did not authorize Lehman to solicit, and Lehman
did not solicit, any indications of interest from any third party with respect
to the purchase of all or a part of the Company's business. Lehman was not
requested to and did not make any recommendation to the Board of Directors of
the Company as to the form or amount of the consideration to be received by the
Company's stockholders in the Merger, which was determined through arm's-length
negotiations between the parties. In arriving at its opinion, Lehman did not
ascribe a specific range of value to the Company, but rather made its
determination as to the fairness, from a financial point of view, of the
consideration to be offered to the Company's stockholders in the Merger on the
basis of the financial and comparative analyses described below. The Lehman
Opinion is for the use and benefit of the Board of Directors of the Company and
was rendered to the Board in connection with its consideration of the
Transaction. The Lehman Opinion is not intended to be and does not constitute a
recommendation to any stockholder of the Company as to whether such stockholder
should tender their Shares. Lehman was not requested to opine as to, and its
opinion does not address, the Company's underlying business decision to proceed
with the Transaction.
In arriving at its opinion, Lehman reviewed and analyzed: (1) the Merger
Agreement and the specific terms of the Transaction, (2) such publicly available
information concerning the Company and Canadian National that Lehman believed to
be relevant to its analysis, (3) financial and operating information with
respect to the business, operations and prospects of the Company furnished to
Lehman by the Company, (4) financial and operating information with respect to
the business, operations and prospects of Canadian National furnished to Lehman
by Canadian National, (5) a trading history of the Company Common Stock from
1995 to the present and a comparison of that trading history with those of other
companies that Lehman deemed relevant, (6) a trading history of Canadian
National Common Stock from 1995 to the present and a comparison of that trading
history with those of other companies that Lehman deemed relevant, (7) a
comparison of the historical financial results and present financial condition
of the Company with those of other companies that Lehman deemed relevant, (8) a
comparison of the historical financial results and present financial condition
of Canadian National with those of other companies that Lehman deemed relevant,
and (9) a comparison of the financial terms of the Transaction with the
financial terms of certain other recent transactions that Lehman deemed
relevant. In addition, Lehman has had discussions with the management of the
Company and Canadian National concerning their respective businesses,
operations, assets, financial conditions and prospects and the cost savings and
other strategic benefits expected to result from a combination of the businesses
of the Company and Canadian National and have undertaken such other studies,
analyses and investigations as Lehman deemed appropriate.
In arriving at its opinion, Lehman assumed and relied upon the accuracy and
completeness of the financial and other information used by it without assuming
any responsibility for independent verification of such information and further
relied upon the assurances of management of the Company that they were not aware
of any facts or circumstances that would make such information inaccurate or
misleading in any material respect. With respect to the financial projections of
the Company, upon advice of the Company, Lehman assumed that such forecasts have
been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
financial performance of the Company and Lehman relied upon such projections in
performing its analysis. However, for purposes of its analysis, Lehman also
applied a sensitivity analysis to certain assumptions which resulted in certain
adjustments to the estimates of the future financial performance of the Company.
With respect to the financial projections of Canadian National, upon advice of
Canadian National and the Company, Lehman assumed that such projections have
been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of Canadian National as to the future
financial performance of Canadian National and Lehman relied upon such
projections in rendering its opinion. In arriving at its opinion, Lehman did not
conduct a physical inspection of the properties and facilities of the Company or
Canadian National and did not make or obtain any evaluations or appraisals of
the assets or liabilities of the Company or Canadian
11
<PAGE> 12
National. The Lehman Opinion necessarily is based upon market, economic and
other conditions as they existed on, and could be evaluated as of, the date of
such opinion.
In connection with the preparation and delivery of its opinion to the
Company's Board of Directors, Lehman performed a variety of financial and
comparative analyses, including the analyses described below. The preparation of
a fairness opinion involves various determinations as to the most appropriate
and relevant methods of financial and comparative analysis and the application
of those methods to the particular circumstances and, therefore, such an opinion
is not readily susceptible to summary description. Furthermore, in arriving at
its opinion, Lehman did not attribute any particular weight to any analysis or
factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Lehman
believes that its analyses must be considered as a whole and that considering
any portion of such analyses and factors, without considering all analyses and
factors, could create a misleading or incomplete view of the process underlying
its opinion. In its analyses, Lehman made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of the Company and Canadian
National. In its analyses, Lehman assumed stable business and economic
conditions and a stable competitive environment in the markets in which the
Company operates. These assumptions are beyond the control of the Company and
Canadian National. Any estimates contained in these analyses are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than as set forth therein. In addition,
analyses relating to the value of businesses do not purport to be appraisals or
to reflect the prices at which businesses actually may be sold.
Among the analyses performed, Lehman reviewed the public stock market
trading multiples for selected companies that Lehman deemed comparable. The
companies in the comparable universe are Burlington Northern Santa Fe
Corporation, CSX Corporation, Kansas City Southern Industries, Inc., Norfolk
Southern Corporation and Union Pacific Corporation. Using publicly available
information, Lehman calculated and analyzed the common equity market value
multiples of certain historical and projected financial criteria (such as net
income, net income plus depreciation and amortization and pre-tax income plus
depreciation and amortization) and enterprise value multiples of certain
historical and projected financial criteria (such as revenue, earnings before
interest, taxes, depreciation and amortization ("EBITDA"), and earnings before
interest and taxes ("EBIT")). The enterprise value of each company was obtained
by adding its short and long-term debt to the sum of the market value of its
common equity, the value of its preferred stock (market value if publicly
traded, liquidation value if not) and the book value of any minority interest
minus its cash and cash equivalents. Particularly because of the differences in
depreciation and amortization allowances, primarily resulting from acquisition
accounting, the most relevant multiples were determined by Lehman to be
multiples of EBITDA, pre-tax income plus depreciation and amortization and net
income plus depreciation and amortization. Excluding the multiples of Kansas
City Southern Industries because a large proportion of its results is
contributed by a financial services subsidiary, as of February 6, 1998, the
comparables' median multiples of actual or, where necessary, estimated pro
forma, latest twelve months ("LTM") EBITDA, pre-tax income plus depreciation and
amortization, and net income plus depreciation and amortization were 7.4x, 6.3x
and 8.0x, respectively, as compared to corresponding Company multiples at an
assumed consideration payable per Share of $39.00 pursuant to the Offer and the
Merger, considered as a unitary transaction of 9.7x, 9.1x and 13.1x. Lehman
calculated the implied equity values per Share for LTM EBITDA at a range of 6.5x
to 8.5x, pre-tax income plus depreciation and amortization at a range of 5.5x to
6.5x, and net income plus depreciation and amortization at a range of 7.0x to
8.5x, which yielded implied equity values per Share of $23.50 to $33.00, $23.50
to $27.75 and $20.75 to $25.25, respectively.
However, because of the inherent differences between the businesses,
operations, financial conditions and prospects of the Company and the
businesses, operations, financial conditions and prospects of the companies
included in the comparable company group, Lehman believed that it was
inappropriate to, and therefore did not, rely solely on the quantitative results
of the analysis, and accordingly, also made qualitative judgments concerning
differences between the financial and operating characteristics of the Company
and companies in the comparable company group that would affect the public
trading values of the Company and such comparable companies.
12
<PAGE> 13
Lehman reviewed certain publicly available information on selected
transactions which took place from 1992 to 1997 that Lehman deemed comparable.
The comparable transactions included, among others, Norfolk Southern and CSX's
joint acquisition of Conrail Inc., Union Pacific's acquisition of Chicago and
North Western and Burlington Northern's acquisition of Santa Fe Pacific. For
each transaction, relevant transaction multiples, as described above, were
analyzed. At the announcement date of those transactions, the median acquisition
multiples of the LTM EBITDA, pre-tax income plus depreciation and amortization,
and net income plus depreciation and amortization were 8.4x, 7.7x and 10.2x,
respectively, as compared to corresponding Company multiples at an assumed
consideration payable per Share of $39.00 pursuant to the Offer and the Merger,
considered as a unitary transaction of 9.7x, 9.1x and 13.1x. Lehman calculated
the implied equity values per Share for LTM EBITDA at a range of 8.0x to 10.0x,
pre-tax income plus depreciation and amortization at a range of 7.5x to 9.5x,
and net income plus depreciation and amortization at a range of 10.5x to 12.5x,
which yielded implied equity values per Share of $30.75 to $40.25, $32.00 to
$40.50 and $31.25 to $37.00, respectively.
However, because the market conditions, rationale and circumstances
surrounding each of the transactions analyzed were specific to each transaction
and because of the inherent differences between the businesses, operations,
financial conditions and prospects of the Company and the acquired businesses
analyzed, Lehman believed that it was inappropriate to, and therefore did not,
rely solely on the quantitative results of the analysis, and accordingly, also
made qualitative judgments concerning differences between the characteristics of
these transactions and the Merger that would affect the acquisition values of
the Company and such acquired companies.
Additionally, as part of its analysis, Lehman prepared a discounted cash
flow model that was based upon financial projections prepared by management of
the Company. Lehman used after-tax discount rates of 10% to 12% and a terminal
value based on a range of multiples of estimated EBITDA in 2002 of 6.5x to 8.5x.
Based on these discount rates and the midpoint of the terminal values, Lehman
calculated the implied equity value per Share at approximately $35.00 to $38.75.
Lehman performed a dividend discount analysis to estimate the present value
of dividends and the estimated future value of the Shares. The present value was
calculated by adding the present value of the estimated dividend stream for the
next five years to the present value of the estimated price per share in 2002.
Lehman assumed (i) a constant annual dividend per share of $0.92, (ii) net
debt/total net capitalization is held constant at 45% by means of a share
repurchase program, (iii) a range of multiples of earnings per share of 14.0x to
16.0x and (iv) equity discount rates based on the midpoint of 14% to 16%. Based
on these assumptions, the indicated range of values per Share was approximately
$34.00 to $39.00.
Lehman analyzed the estimated pro forma effect of the Transaction on the
earnings per share of Canadian National. For the purposes of this analysis,
Lehman assumed (i) a $39.00 per share price for the Shares acquired pursuant to
the Offer and the Merger, (ii) a $56.00 per share price for Canadian National
(the closing market price per share on February 6, 1998), (iii) a transaction
structure with 75% of the consideration paid in cash and 25% paid in Canadian
National Stock, (iv) financial forecasts for each company from management of the
Company and Canadian National and (v) cost savings and synergies from the
Transaction determined by the management of the Company. Lehman estimated that,
based on the assumptions described above, the pro forma impact of the
Transaction on the earnings per share of Canadian National would be 8.5%, 15.4%
and 14.9% accretive in the first three years following the Transaction. The
financial forecasts that underlie this analysis are subject to substantial
uncertainty and, therefore, actual results may be substantially different.
Lehman performed a leveraged acquisition analysis in order to ascertain the
price which would be attractive to a potential financial buyer based upon
current market conditions. Lehman assumed the following in this analysis: (i) a
capital structure comprised of $1,200 million in senior debt and $500 million in
subordinated debt, (ii) an equity investment that would achieve a rate of return
of approximately 24-34%, and (iii) a 7.5x 2002 projected EBITDA exit multiple.
Based on these assumptions, the range of implied leveraged acquisition prices
per Share was $27.00 to $31.00.
13
<PAGE> 14
Lehman is an internationally recognized investment banking firm and, as
part of its investment banking activities, is regularly engaged in the
evaluation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes.
As compensation for its services in connection with the Merger, the Company
agreed to pay Lehman a fee of $1,750,000 upon delivery of the Lehman Opinion. In
addition, the Company has agreed to reimburse Lehman for reasonable
out-of-pocket expenses incurred in connection with the Merger and to indemnify
Lehman for certain liabilities that may arise out of its engagement by the
Company and the rendering of its opinion.
Lehman has performed various investment banking services for the Company in
the past and has received customary fees for such services. In the ordinary
course of business, Lehman actively trades in the debt and equity securities of
the Company and Canadian National for its own account and for the accounts of
its customers and, accordingly, may at any time hold a long or short position in
such securities. Alan Washkowitz, a Managing Director of Lehman, is a member of
the Board of Directors of Illinois Central.
Item 8 is hereby further amended and supplemented by adding thereto to a
new subsection Item 8(d) as follows:
(d) STB Advisory Opinion
On February 25, 1998, the STB issued an informal advisory opinion stating
that the use of the Voting Trust would preclude unlawful control of the Company
by Canadian National.
ITEM 9.
Item 9 is hereby amended and supplemented by adding the following Exhibits:
*+(a)(8) Amendment No. 1 to Offer to Purchase dated March 2, 1998
++(c)(18) Amendment No. 1 to Agreement and Plan of Merger, dated as of
March 4, 1998
+(c)(19) Memorandum of Understanding
- ---------------
* Included in materials delivered to shareholders of the Company
+ Filed as an Exhibit to Purchaser's Amendment No. 1 to the Tender Offer
Statement on Schedule 14D-1, dated March 2, 1998 and incorporated herein by
reference.
++ Filed herewith.
14
<PAGE> 15
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this Statement is true, complete and
correct.
ILLINOIS CENTRAL CORPORATION
Date: March 6, 1998
By /s/ RONALD A. LANE, ESQ.
------------------------------------
Name: Ronald A. Lane, Esq.
Title: Vice President and General
Counsel
\
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE NO.
------- ----------- --------
<S> <C> <C>
*+(a)(8) Amendment No. 1 to Offer to Purchase dated March 2, 1998
++(c)(18) Amendment No. 1 to Agreement and Plan of Merger, dated as of
March 4, 1998
+(c)(19) Memorandum of Understanding
</TABLE>
- ---------------
* Included in materials delivered to shareholders of the Company.
+ Filed as an Exhibit to Purchaser's Amendment No. 1 to the Tender Offer
Statement on Schedule 14D-1, dated March 2, 1998 and incorporated herein by
reference.
++ Filed herewith.
<PAGE> 1
Exhibit (c)(18)
AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER
AMENDMENT NO. 1 dated as of March 4, 1998 to the Agreement and Plan of
Merger dated as of February 10, 1998 (the "AGREEMENT") among Illinois Central
Corporation, a Delaware corporation ("IC"), Canadian National Railway Company,
a Canadian corporation ("CN"), and Blackhawk Merger Sub, Inc., a Delaware
corporation and a wholly owned subsidiary of CN ("MERGER SUBSIDIARY").
WHEREAS, the parties hereto desire to amend the Agreement as set forth
below.
NOW, THEREFORE, the parties hereto agree as follows:
Section 1.01. Defined Terms; References. Unless otherwise specifically
defined herein, each term used herein which is defined in the Agreement has the
meaning assigned to such term in the Agreement. Each reference to "hereof",
"hereunder", "herein" and "hereby" and each other similar reference and each
reference to "this Agreement" and each other similar reference contained in the
Agreement shall, after this Amendment becomes effective, refer to the Agreement
as amended hereby.
Section 1.02. Contingent Amendment of Section 2.02 of the Agreement. (a)
The parties hereto expressly agree that the amendments to Section 2.02 of the
Agreement set forth in paragraphs (b) and (c) of this Section 1.02 shall only
become effective at such time as (i) the Delaware Court of Chancery has entered
an order approving the Settlement (as such term is defined in the Memorandum of
Understanding dated as of February 27, 1998 among IC, the members of IC's Board
of Directors, CN Merger Subsidiary and the plaintiffs in such Actions) and such
order has been finally affirmed on appeal or is no longer subject to appeal and
the time for any petition for reargument, appeal or review, by certiorari or
otherwise, has expired and (ii) all of the other conditions precedent to the
effectiveness of the Settlement shall have been satisfied.
(b)(i)Subject to paragraph (a) of this Section 1.02, the proviso in the
definition of "CN Average Closing Price" in Section 2.02(c) of the Agreement
shall be amended in its entirety to read as follows:
<PAGE> 2
"provided that if such average closing price is less than $41.50 then the
CN Average Closing Price shall be $41.50 and if such average closing price
is greater than $64.50 then the CN Average Closing Price shall be $64.50."
(ii) Subject to clause (i) of Section 1.04 of the Agreement and to
paragraph (a) of this Section 1.02, in the event that the average closing price
of the CN Common Stock on the NYSE for the twenty trading day period ending on
the second trading day prior to the date of the Effective Time shall have been
less than $43.00, CN will promptly cause the Exchange Agent to send to each
person who was a record holder of shares of IC Common Stock at the Effective
Time the additional Merger Consideration such person would have received had the
amendment referenced in clause (i) of this Section 1.02(b) been in effect
immediately prior to the Effective Time.
Section 1.03. Amendment of Section 10.01. A new paragraph (d) shall be
added to Section 10.01, to read as follows:
"(d) Merger Subsidiary shall have purchased shares of IC Common Stock
pursuant to the Offer."
Section 1.04. Amendment of Exhibit B to the Agreement. The first sentence
of Section B.1. of Article 7 of Exhibit B to the Agreement is hereby replaced
and amended in its entirety to read in full as follows:
"Each person who was or is a party or is threatened to be made a party
to, or is involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person is or was a director or officer of the Corporation
or is or was serving at the request of the Corporation as a director or officer
of another corporation, partnership, joint venture, trust or other enterprise,
shall be indemnified and held harmless by the Corporation to the fullest extent
permitted by applicable law."
Section 1.05. Amendment of Exhibit D to the Agreement. The first sentence
of the final paragraph of Exhibit D to the Agreement is hereby replaced and
amended in its entirety to read in full as follows:
"The parties agree that any cross-references, section references or
designations or schedule designations shall be deemed to be modified to
reflect the modifications set forth in this Exhibit D, it being understood
that the deletion, pursuant to this Exhibit D, of any provision of the
Agreement that contains a definition of a term that is used in other
provisions of the Agreement shall not result in the deletion of such term
in
2
<PAGE> 3
such other provisions (unless such other provisions are also expressly
deleted pursuant to this Exhibit D)."
Section 1.06. Amendment of Section 12.03 of the Agreement. Section 12.03
of the Agreement is hereby replaced and amended in its entirety to read as
follows:
"Subject to Section 11.02, the representations and warranties and
agreements contained herein and in any certificate or other writing delivered
pursuant hereto shall terminate at the Effective Time or upon the termination
of this Agreement, except that (i) the provisions of Section 2.02, (ii) the
covenants and agreements of IC contained in Sections 6.01 and 6.02 and (iii)
the covenants and agreements of CN contained in Sections 7.06, 8.01, 8.02, 8.03,
8.07 and 9.03 shall survive the Effective Time and shall remain in full force
and effect in accordance with their terms."
Section 1.07. Representations of Each Party. Each party represents and
warrants that (i) the execution, delivery and performance of this Amendment by
such party have been duly authorized by all necessary corporate action and (ii)
this Amendment constitutes a valid and binding agreement of such party.
Section 1.08. Governing Law. This Amendment shall be construed in
accordance with and governed by the laws of the State of Delaware.
Section 1.09. Counterparts; Effectiveness. This Amendment may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Amendment shall become effective when each party hereto shall have
received counterparts hereof signed by all of the other parties hereto.
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No.1 to
be duly executed by their respective authorized officers as of the day and year
first above written.
CANADIAN NATIONAL RAILWAY
COMPANY
By:
---------------------------------------------------------
Name:
Title:
BLACKHAWK MERGER SUB, INC.
BY:
---------------------------------------------------------
Name:
Title:
ILLINOIS CENTRAL CORPORATION
BY:
---------------------------------------------------------
Name:
Title:
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