The Ed Ellis Story (continued)

Posted by Fred Frailey
on Tuesday, April 29, 2014

In case you missed the news, things are happening over at Iowa Pacific Holdings in Chicago. IPH, founded in 2001 by Ed Ellis and a group of his friends and railroad colleagues, operates the Chicago-New Orleans Pullman Rail Journeys and owns 10 short line railroads. What has made Iowa Pacific so fascinating to many of us is that wherever it goes, passenger trains seem to follow.

The news is that Ellis and the other owners of IPH have sold an 80 percent interest in the company to Sam Zell’s family investment office, which goes under a couple of names, mainly Chai Trust. Zell is the outspoken Chicago investor whose investment kept the Santa Fe Railway from being taken over and torn apart by corporate raiders in the 1980s. He also briefly controlled the Tribune Company, an investment that did not go well when the newspaper enterprise could not service its debt and entered bankruptcy.

Anyway, people are asking what this all means. Is Pullman Rail Journeys soon to be history? So I called Ed yesterday and interrupted his peaceful evening. I will let him tell the story:

“I started this with $18,000, with me and Clark Johnson and a few other guys. We bought a bunch of railroads that weren’t making any money and turned them around and reinvested every dollar we earned. I completely refinanced the company last December, for $95 million. I took Christmas off and said to my guys, it’s time to pivot. We’re okay but how can we grow the company? For that, we need serious equity.”

Stop there for a second. The amazing thing is that a mere $18,000 invested by the owners, some incredible success stories, and a lot of borrowed money has kept this company afloat. Let’s continue:

“I called our bank, JPMorgan Chase, and they asked if we would be interested in a family office. Anybody who makes a bunch of money hires someone to find good companies to invest in. There are hundreds of these family offices around the country. I said I wanted to connect with someone who wants to be in this for the long term, like Warren Buffett. The banker said he had somebody, the family office of Sam Zell.

“We met with him and presented everything that we do. His guys climbed all over our passenger cars. We went over the numbers—how much money we make and don’t make. They understand the business, in other words. They are comfortable with our passenger operations.

“So the message to our true believers: I’m in Pullman to make money. I’m not going to run it the rest of my life if it won’t make money. The investors believe in me and are okay with it. We’re developing a business. Everything we ever bought lost money at the start. If you can develop a business, you will come out okay.

“How does this affect us? A solid financial underfooting is important. The passenger businesses we operate are very important to us, too. We do things that are transformational. Right now we are seeking to run the Hoosier State passenger train for the state of Indiana. If we succeed, it will have significant consequences for other states. We would like to run a Pullman service between Chicago and New York, perhaps using the Cardinal. The Zell people will let us continue. They are not afraid to break a few eggs. We’re doing things that ought to be done, to see if they work.”

This is vintage Ed Ellis, by the way. He defies categorization. He thinks and acts outside any box you want to put him in. That is why the Iowa Pacific saga fascinates me and so many others. Readers of Trains Magazine who remember the June 2013 article about Ed and Iowa Pacific understand this.

Do I believe Ed Ellis will live happily ever after at Iowa Pacific? No, I don’t. I hope he does, but events of this magnitude — the entrepreneur selling control of his creation — have a way of going in unexpected directions. Sam Zell, from what I know of him, is a lot like Ed, someone not cut from the same cloth as the rest of us. Ed and Sam could make a wonderful pair. They could just as easily be combustible.

I think back to the time, almost 30 years ago, when the employee-owners of the newsmagazine U.S.News & World Report sold the enterprise to Mort Zuckerman, a wildly successful property developer with an interest in public policy. “I am not buying a magazine so much as I am buying the talents of you people, the writers and editors,” he told us. Mort then proceeded to fire and demote us as quickly as he could. It was an interesting experience to live through, and I ended up okay. So I wish Ed (and Sam) the very best, while knocking on wood.—Fred W. Frailey

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