Short Line Investment?

Trains Magazine General Discussion
1

An open question to the forum.

How many of you would seriously consider investing in a new short line startup and why?

Please assume that the pro forma financials reflect that the short line has a small existing customer base and is a Class 1 spinoff. The company expects to buy or lease the property and is in negotiations with the Class 1 for the property.

(No, I am not planning a new short line and this is not a request for investors, I’m just curious to see what the general interest level is).

If the investment required a minimum of $10,000 per share with 1,000 total shares would that change your mind?

LC

2

Oh, and also, please assume that the management team will contribute at least $500,000 reprersenting 50 shares and will retain operational control of the company.

LC

3

For me it would depend on the expected revenues and what kind of customers they were targeting. For example, if a shortline was investing in an area with a high demand for rail in industrialized areas such as say Hamilton, Ontario; Brampton, Ontario or Sarnia, Ontario; that would be such a reason for an investment. If the area is a high revenue generator, than a decent ROI should be expected. Of course it also depend on the kind of competition too (CN and CP operate switching in some areas however places such as Hamilton, Ontario is primarily switched by Rail America).

Another reason would be if I was a farmer, agriculture investor or had some kind of white collar interest in a mine and I need to ship my goods form point A to B and a class 1 wasn’t interested in doing it, than I would have no choice but to seek a shortline operator if I was still interested in going that route. It would depend on the tonnage of course and projected amount of cost saving versus any other mode of transportation. Most likely though, rail would be cheaper.

For a political reason, I would say investing in rail would keep the taxes under control hopefully as it would reduce the maintainance cost on roads from truck use. I would also reduce hopefully, gridlock areas prone to such heavy traffic from trucks. It would also give industrial opportunities for future economic development to an area. Large industries that deal with the shipment of large quantities of items in bulk usually prefer a rail option hense a rail operation in an area offers a possible job creation if other desirable requirements are met for the industry to locate to that area in the first place-rail is just an added assentive.

4

Yes. When I was still a teenager I bought 200 shares of Pioneer RR stock. Just because I had the money and saw an advertisement for it in Train’s magazine. 10yrs later I sold it for 4.5 times as much when my first child was born and needed the cash. But the 10 grand part would hold me back cause I don’t have it hehe.

I guess the other cavat for me would be I would want to participate with it, not just own it.

5

yea i think i would lay out the $10k, but only if i had a personal interest in it. if it was to create some sort of a co-op(?) to haul my corn away and/or to haul fertilizer in cheaper or provide overall better service to my area then i’d have no problem.

but to throw 10 large out to B.F. oregon for a shortline to haul logs 3 miles, then no.

i hope that answers your question. if not then i don’t know the legalese some of the fast talkers do to explain it in more detail.

6

Assuming I was in an investing mode, sure. Maybe 1 to 5 shares if the prospectus indicated that profit was a goal and the business plan indicated that there was a reasonably good chance that the goal could be met.

On the other hand, I don’t think I would part with 10k for a vanity investment.

7

LC,
Need some clarity…
Is the GM, CEO and CFO, along with the Super, MOW and such all a one man band?
I have seen a few of these, and, in my opinion, one guy can’t be all things at once…so, if it isn’t a one man show, who is the hired talent?

If I could “hire” you, along with mudchicken, Jay and a couple of other with a proven track record, then sure, count me in…

On the other hand, if we are trying to do this on the cheap…

Ed

8

Ed -

As I said, this is only a hypothetical question. I wasn’t meaning to imply a one man band. Assuming I could get the kind of investment I proposed in the hypothetical I would be glad to participate. If we actually had investors sufficient to purchase all 1,000 we would have a fund of $10,000,000 ca***o buy and run a RR. That would be quite a nice little short line and that isn’t even including any borrowing.

Typically, in my experience, a handful of people are involved in starting a new RR (legally known as the “Promoters”). Once they have a deal, they then seek to raise the investment necessary to consummate the purchase. Typically they would have a small cadre of qualified people to initiate the startup including hiring additional necessary personnel.

LC

9

LC,

I understood this is a exercise in the hypothetical…

What I was looking for is the specifics of who is going to run the show in this experiment…
And I trying to point out that one man can not do it alone…you have to be able to find, recruit and motivate talent in key positions.

When my Dad retired from the Navy, he bought a wholesale hardware company.
One of his suppliers asked why he took as many fishing trips as he did,
because he would go off every couple of weeks for a weekend down at the coast, and the guy didnt understand how he could afford to do that.

My Dad’s answer makes a lot of sense to me, and I have applied to every business I have been involved in…

"I can’t understand a business owner or manager who is proud of having to work through his vacation…if he is a good business manager, he has hired and trained his people to the point he can afford to take a few weeks off, and be assured the business is still running quite well in his absence.

“A lousy manager tries to cut it so thin he cant afford to take a few days off, much less a vacation…that’s the guy who isn’t managing his business, its the other way around, the business is managing him”…

So, if you could get the number of investors, at the share price you stated, who would you have in mind for the key positions?

You were searching for those interested, just to see how many.
Well, I would be one of them, but this is part of the reason as many “short lines” seem to fade away as any other…they don’t hire the talent to run the business, they let the business dictate who they can hire.

Leadership starts at the top, and filters down…so who would you list in the prospectus as the top guys?

Ed

10

LC - Ed and I are of the same line of thought here. Neither of us would invest in it sight unseen, we want to “kick the tires” and see who the players are. I’m not going to put all of my eggs in one shaky basket (1-2 shares, max) and I have seen shortlines with promise fail and others that appeared high risk succeed by pure dumb luck. Then again I’ve seen several fail due to myoptic operating management. (Not trying to revisit that disagreement again, honest!) I gotta know more about the variables and fixed assets before I would commit on what’s stated here hypothetically…[D)][D)]

11

I’d certainly consider it depending on the circumstances and the revenue base and prospects of the particular line. However, as MC points out, I too would want to “kick the tires” before signing a check [:)].

12

OK. I understand the desire for additional due diligence. Remember that the example below would be one of several that would be possible if the full $10 Million could be raised.

I’ll add a few more hypothetical facts. Some have been changed slightly to maintain confidentiality. Remember this is hypothetical only and no offer or other investment opportunity exists. This is merely for discussion purposes. The people described are real some details of their background have been slightly modified to protect their privacy.

Proposed Management Team:

  1. President - Background -Locomotive Engineer/Conductor - Class 1, 6 years; Attorney 15 years (significant time spent representing several RRs in different deals and litigation); Past short line management experience 5 years, also experienced with deal structures and financing; DSLE. B.A. J.D. Total of 15 years RR experience.

  2. Vice President - Operations/Engineering - Background- Former Chief Engineer - Class 1 RR, progressed thru engineering ranks on another Class 1. Also Locomotive Engineer/Conductor and FRA qual. track inspector. Has operated his own short lines in the past (3). Total of 28 years RR experience.

  3. Board Member - Background - Managing Director - Major Investment Bank - B.S. MBA Some RR deal background.

  4. Controller - 15 years experience in RR finance. Class 1 and Class 3 B.S./M.S. Accounting

  5. Manager Mechanical - 5 years Class 2 Mechanical Dept., Lic. Servicing Engineer, certified carman, machinist. 2 years MOW Experience.

  6. General Manager - To be determined upon acquisition.

Property: (First of several)

Location; Southeast U.S.

32 miles. 115# and 112# with some 100# in sidings. Jointed. 2 miles of 115# CWR.
timber ties. 6 bridges all steel. Ruling grade 0.7%. Max curvature 10 degrees. Runs along river. Interchange: NS and CSX. Paper barriers possible.

Traffic: 2,400 carloads

13

Doesn’t how far you haul it effect the revenue?

14

With short lines, not necessarily. Depends upon your agreement with the Class 1s.

LC

15

I wouldn’t sell the farm to make the investment, but I would consider adding some share of the railroad to a diversified portfolio.

If I was younger, I might consider taking more shares, thus increasing my level of risk, but I would also be looking for some form of active participation in the venture.

16

Other than the coal mines, sure sounds a lot like the Chattahoochee Industrial Railroad.

I’d be interested in making the investment, if I had the money.

17

yeah, dang this money thing eh Jodom?

18

I wouldn’t want to buy a share or two just to say I owned it, but if I had the money to buy a sizeable stake (say at least 10 shares or 1%) and was reasonably assured that I could see a nice return on my investment, then sure, I’m always looking for new investment opportunities.

19

Yeah I think Guilford is a good example of what can go wrong when you have someone with money buy into the industry who doesn’t really seem to understand it. Guilford has been the black sheep of the family for as long as I can remember now.

20

Good so far…
Interchange points, single yard or multiple points?
Last bridge inspections were done when?
And next ones are due?

6 locomotives and 4 T&E…guessing two trains a day working as a turn plus a twice weekly coal drag…
What is the current debt load, and last, why is current owner getting rid of it?

Ed