Just saw a news blurb that US Express is going private. Swift has already gone private.
So is it inconceivable that a Class I may go private in the foreseeable future, say a KCS?
Nothing is impossible, but some things are a lot less probable than others.
Consider relative capitalization, and who holds the shares. If the majority of shares are held by a (relatively) small number of like-minded investors, going private is relatively easy.
If the huge number of outstanding shares are held by banks, insurance companies and retirement trusts, with private individuals confined to small percentage holdings, going private is extremely unlikely.
But, nothing is impossible!
Chuck
Let’s say that Wall Street is a leech and a parasite. There is too much effort and spinning wheels trying to keep up with the infantile demands of shareholders.
Roll them wheels and keep the profit inside the company, pay the workers thier share and bank the savings against breakdowns and old equiptment.
If they have to go private to do it, then do it.
I worked for a company years ago that spent so much money, effort and time wining and dining shareholders and other VIP they forgot to tell the dispatchers, office workers and drivers how much they are appreciated and loved. I learned a lesson. If the Trucking company has a lobby with 30,000 dollars worth of old furnature, turn around and find another who are focused on running loads. I even recall telling the President on paper that little fact.
I have been told many times that I have trouble with those who are not in touch with the dispatch, docks and truck shop. Best the suits stay over there and I stay over here. LOL.
There is a huge difference in the valuations of trucking companies and the railroads. It appears the days of ENORMOUS leveraged take outs may be nearing the end, at least during this cycle. Interest rates are beginning to rise and cheap money is a not so distant, but fleeting memory.
Last week there were several low investment grade debt offerings which did not fly (Servicemaster and Dollar General are two). The entire subprime mortgage situation, which have been collateralized into CDO’s with other debt to create tranches of debt, based on risk is creating severe volitility in the markets.
On the other hand, if any railroad will be taken private, it probably would be KCS. They are the only legit opportunity at this time, based on their potential Internal rate of return model. Their OR is high enough that sharp penciled financial types could work their wonders (or at least try). Plus, they have the best growth potential of all the railroads at this time.
I dont think it will happen. The debt load would be very expensive and there are too many things that could go wrong.
ed
FEC and RRA have been gobbled up by private equity firms and a public equity firm has taken a largish position in CSX. Companies with equity larger than some class 1s have been taken private - Georgia Pacific comes to mind - so nothing’s impossible.
Whadayamean private?!? They’re already private, most of them always have been except for the ones that were owned by the Government for a while, and hence public.
In this context, private means closely held by a small number of shareholders and the shares are not traded on any exchange.
One of the little-commented on side-effects of the STB “return on capital” regulatory attitude is that while condemning captive shippers to non-market pricing for so long as railroads do not earn their [highly artificial] return on capital, the process creates companies which – and the irony is profound – can exploit those shippers to obtain profitability levels which thereupon invite privatization, high debt loads, and enormous vulnerability to business downturns.
The theory has been destructive to captive shippers, and may well prove fatal to the rail industry.
Recent private equity conversions were huge. TXU was taken private earlier this year for $45 billion, Clear Channel for $18.7 billion, and Univision for $12 billion.
These compare with current market capitalizations of BN at $30.8 billion, Union Pacific at $31.4 billion, Norfolk Southern at $21.4 billion, CSX at $20.3 billion, CN at $26.1 billion, Canadian Pacific at $11 billion, and KCS at $3 billion.
According to a managing partner of TCI, which recently invested heavily in US railroad stock, “railways could use more gearing. Most carry debt on the balance sheet of about two times earnings before interest, tax, depreciation, and amortization. He thinks they could bear more than five times.” “The New Railway Barons,” The Economist, 5/17/2007.
"If railway executives fail to gear up, private equity firms may well do it for them. Although most railways are quite large … almost no deal is out of reach
As used here in the good ole…, means the ownership resides with just one real or artificial person. Going from “public” to “private” means that all the outstanding stock has been acquired by one “person”. Since the general public does not participate in the ownership and there is no trading of shares, the “privately” owned entity is substantially exempted from our Security Exchange Commision rules for reporting financial results.
However, a privately held railroad would still be subject the reporting rules as set forth in our Surface Transportation Act.
Michael:
Good to hear from you again. I do not dispute there have been larger take outs this year. TXU is a rather interesting one in particular. The quote from the Economist is interesting. However, I submit that the private equity market has changed rather dramatically since that article in May.
Junk debt is not moving well. It was a seller’s market for debt placement up until mid June. Now it has very quickly turned. Buyers of debt are now demanding strict covenants regarding debt to cap, interest earned and others. PIK (payment in kind) has all but disappeared.
While BNSF and UP are “within reach”, the IRR numbers do not support the risk involved. KCS is probably the only one in which it would work and that is based on growth potential and cutting of costs.
ed
Oh, I agree, and with your earlier comment as well; these things move in cycles, and the private buy-outs have hit a high this past year. And tempting targets are certainly harder to find, and more expensive as well. On the other hand, that may mean more money searching for fewer opportunities.
TCI and Carl Icahn still seem to moving toward … something … involving the U.S. rail industry, and big buyers have been buying at what would ordinarily be at a topping out of stock prices – topping out both because most of the run up due to pricing power seems to have already occured, and because of the point in the business cycle.
I have long maintained that captive pricing distorts investment decision making and that it was ultimately harmful for railroads to rely for their profitability on a relatively smaller number of shippers while offering cheaper or even cross-subsidized rates to a larger number of shippers. The STB policy of not ensuring application of market analysis to captive rates, until such point as railroads reach “revenue adequacy” introduced all sorts of distortions throughout the economy. It was “negative” regulation – that market analysis would not be applied until such time as … they engendered enough exploitable distortion that they went private, and could not be regulated at all?
The idea of the Staggers Act was that the market itself would provide the benchmark for rate reasonableness in those instances where a true market did not exist. The STB has confounded that theory by saying it would not apply the regulation until railroads reached revenue adequacy – which the STB saw as economic health. These private equity guys
I don’t think the climate is very good right now for any leveraged buyouts involving Class 1 railroads–and for reasons over and above the very good ones Ed presented regarding the drying up of the debt market.
The future looks more sanguine for the rail industry than it does for the trucking industry, and I think, as a group, that railroad shareholders are much more comfortable with their ownership positions than might be the case with many trucking firms.
The market capitalization figures given earlier for the major railroads don’t even resemble what it would take to launch a serious leveraged buyout bid. You’re not going to buy out the shareholders of Norfolk Southern or BNSF for a 50% premium. It might a bid of 3 or 4 times the current stock price to seriously tempt a board of directors and a majority of shares to okay an offer. And that is a big gulp!!
Warren Buffet has repeatedly demonstrated that he never has a hidden agenda when making a major stock purchase. Carl Icahn always does, but I do not believe, in the last analysis, that even he envisions
a privatization of CSX. I speculate that he is trying to accumulate enough power to change some of CSX’s policies for his own short-term gain.
As a secondary consideration, the political climate is dicier as we head into a big election year. Now would not be a good time to completely outrage a large group of captive shippers. I surmise that current railroad managements are quite aware of the value of what they won with the Staggers Act, etc., and wouldn’t be the slightest bit reluctant to discuss those implications at length with Wall Street in general and with shareholders in particular should they suddenly find themselves faced with potential hostile takeovers.
Joe
One recurring theme of Hilton & Due’s book on interurans was that they typically used a relatively high level of debt financing (bonds) and ran into trouble when the revenues dropped below operating costs and interest. Debt financing is not appropriate for companies that experience with cyclical revenues.
Unfortunately you are probably correct in that LBO’s usually benefit the likes of Carl Icahn more than they do the general investing public (though I have made some good many from owning stock that were bought out), the employees and customers.
Hey Joe…welcome aboard.
NS seems to have calmed down a bit over here. Anything new your way?
ed
Interesting thoughts about debt and cyclicals. I read today where Cerebus debt for Chrysler will be considered non - investment grade ( kind words for junk bonds). The higher leverage certainly makes interest coverage much more interesting for bond holders. What makes Chrysler so attractive is the potential to reduce costs thru containment and elimination of legacy costs, such as retirement benefits (health insurance primarily). UAW just took a huge haircut on the new contract for Delphi, dropping wages over $10 per hour. They knew it had to be done, auto parts are easily manufactured elsewhere today. There is no real fat to be trimmed from rail operations at this time.
The thoughts today are that the railroads have pricing power which will stick which will lead to increased margins and the abilities to service the debt.
However, the potential returns on taking a company private are simply not there. Remember, the Private Equity companies take a company private with the purpose of selling later, usually as an IPO. Railroads typically sell at fairly narrow ranges (either PE or EBITA ratios). They are currently at that high water mark. As Ed indicated, it would take quite a bit to get NS on board, which would push the total Enterprise Value thru the roof, making the entire process difficult to justify, not only on an equity basis, but also on a financing platform. They will not be able to squeeze much out of the operations at NS and growth will be steady from here on out. No compelling reason to make the deal.
ed
I would like to take you to page 10 of the TRAINS August 2007 issue, entitled Big investor demands staggering rate hikes by Andy Cummings. In this expose, the British hedge fund known as TCI (which has holdings in CSX, UP, and NS) is demanding a 7% rate hike over 5 years to improve stockholder earnings. The crux of the article is that such a staggering rate hike would cause shippers, already in a dark mood over current rail rates/service, to outright mutiny, and I suppose that would lead to even greater pressure on Congress to re-regulate the industry.
In that vein, do you suppose that the inside stockholders of a Class I might want to go private just to prevent influencial hedge fund holders from really messing things up?
I guess I am confused here about the whole subject. If I am taking a job with the KCS and it is likely they will go private, does this mean that I should not take on the new job, or is still ok.
Unless you are being hired on as a Vice President or higher, don’t worry.
Movie: “Hudsucker Proxy” anyone?
FM:
No insider within any of the railroads owns enough stock to do such a deal. Plus, the minute they declare they are interested in buying the railroad, then their relationship changes. Typically they are then excluded from BoD meetings and discussions. At tht time, they become an “outsider”.
Once again, I will repeat…the debt markets have changed dramatically in the last few weeks. The added debt will cause the new debt and the existing debt to more than likely be considered junk status. Junk debt is not moving right now. Thus, the banks which gave the bridge loans are being saddled with the long term debt. I think you will see than beginning to greatly affect the number of deals made.
ed