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?
futuremodal wrote: 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
-Don (Random stuff, mostly about trains - what else? http://blerfblog.blogspot.com/)
Hugh Jampton wrote: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.
MP173 wrote: 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....I dont think it will happen. The debt load would be very expensive and there are too many things that could go wrong.
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.
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.
"We have met the enemy and he is us." Pogo Possum "We have met the anemone... and he is Russ." Bucky Katt "Prediction is very difficult, especially if it's about the future." Niels Bohr, Nobel laureate in physics
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.
MP173 wrote: 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.
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.
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 see it the opposite -- that such companies don't have enough debt. They laugh at these STB standards.
The U.S. rail industry historically never earned its cost of capital, particularly the screwy way it is defined just for the rail industry. There may be good reasons for that, and I mean that from the standpoint of being able to operate and make long term investment decisions over several business cycles without becoming a takeover target to exploit.
The implications for a privatized Class I railroad seem to me to be substantial -- haven't thought it through much from a regulatory standpoint -- but the idea that a Carl Icahn may be in charge of a major U.S. railroad at some point speaks to wealth enhancement of Carl Icahn at the expense of the industry, shippers, and the U.S. economy. Not sure I like the idea -- but the (non)-regulatory structure of the past several years may have made it inevitable.
MichaelSol wrote: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 see it the opposite -- that such companies don't have enough debt. They laugh at these STB standards.The U.S. rail industry historically never earned its cost of capital, particularly the screwy way it is defined just for the rail industry. There may be good reasons for that, and I mean that from the standpoint of being able to operate and make long term investment decisions over several business cycles without becoming a takeover target to exploit. The implications for a privatized Class I railroad seem to me to be substantial -- haven't thought it through much from a regulatory standpoint -- but the idea that a Carl Icahn may be in charge of a major U.S. railroad at some point speaks to wealth enhancement of Carl Icahn at the expense of the industry, shippers, and the U.S. economy. Not sure I like the idea -- but the (non)-regulatory structure of the past several years may have made it inevitable.
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?
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.
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?
railroadjj wrote: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.
jeaton wrote: railroadjj wrote: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.
MP173 wrote: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.
Wonder how much of the change in the debt market is due to problems with the mortgage industry? My impression is that industry is leaning more towards taking some small losses with the problem loans than cutting their own throats by increasing foreclosures.
I rather think the change with the debt markets will be good for the RR's in the long run - management will be concentrating more on running a railroad than aspiring for a buyout.
erikim:You are probably correct in your assessment of the mortgage problem. The financial folks went a little too far (actually much too far) in developing new mortgage products back 5 years ago. You could get a mortgage with no money down, interest only loans, ARMS with low teaser rates, etc. Those products spurred the economy on as a result of all the new housing.
Take a look at railroad earnings now. Part of the reason they are soft is the decreased carloadings of lumber and wood products. If you look at the railroad's financials and data, you will see those carloadings are down 10 - 20%.
I recall four years ago having a discussion with a mom who worked out of her house as a mortgage loan processor. She would get a daily DHL package of loan apps to process. She was appalled at what was happening. People were getting mortgages that would not qualify in the past. There was the belief that the equity in the houses would rise, thus creating wealth for the borrowers. The bubble burst and housing prices have dropped, in some cases very dramatically. When those loans (most were ARMS with balloons) came due for re-financing, the interest rates had moved up from the low levels, PLUS the teaser rates now became reality rates. Plus the borrowers shaky financials meant they would not get the low mortgage rates, but very high rates because of their situation.
What became of the loans? Brokers that originated the loans sold them to financial companies who then packaged the loans into Collateralized Debt Obligations (CDO's). They would take debt of all kinds and package it together (mortgages, treasuries, corporate, etc.) They then would "slice" those CDO's into tranches of debt, based on risk/returns.
Wall Street was looking for higher debt returns. Remember this was during the time of 4%+ treasury yields. So, they took on the higher debt returns/higher risk. Hedge funds bought the debt and leveraged it with more debt. In other words, they would purchase $10 billion of the high risk debt, using $1 billion of investment money and BORROWING $9 billion. When the loans started to default on the mortgages, which made up only a very small portion of the CDO's it started a chain reaction. Suddenly that slice of debt was worth less, but because of the ten to one leverage became worth considerable less. Add in the fact that these "slices" of debt are not activily traded on financial markets and suddenly you have a "slice" of finacial product which is falling quickly but you DONT HAVE A METHOD OF KNOWING WHAT IT IS ACTUALLY WORTH since it is not traded!
Want to foreclose on the late payment? Go ahead. What are you going to do with it? There are hundreds of millions of unsold NEW houses on the market. These are referred to as "spec" houses, built on speculation by a builder. Cant sell them and cant pay the debt on them. Now what? Foreclosure? Suddenly the financial company holding the debt is now a real estate company with values much lower than what was loaned. OOPS.
How does this affect our railroads you ask, other than diminished carloadings of lumber? Simple. It effectively takes them off of the LBO market. The rails typically have about 30%-%50% debt ratio, meaning that portion is financed by debt, the rest equity. Solid balance sheets backed up by real assets (ROW's, rail cars, etc) which are mortgaged. Having trouble sleeping some night? Read the loan covenants of a railroad. Those debt instruments are have solid ratings by the services such as Moody's, because they are backed by real assets and the railroads have abilities to pay the loans (called debt service).
If and when a private equity company purchases a railroad, they will put a small portion of the payment up with their own cash, the rest is borrowed or leveraged. Think back to the above reference to the hedge funds borrowing 90% to buy investments. Same principal here. Use other peoples money (OPM) to make a large return. Suddenly not only the hedge funds borrowing is going to be junk, but also the existing railroad's debt is junk. Values of the bonds fall to reflect the higher risk and bond holders are going to court to sue. The ability to borrow new money falls because of credit risk. That new capacity expansion project will be at 12% interest instead of 8%. Check out the increased payments on a simple financial engines caluculator what that increase in interest means.
Further, the market for junk debt has taken a tumble. Recent offerings such as US Foodservice and Servicemaster among others have been withdrawn. There is no market for the debt, as structured. That means the banks which loaned the money to private equity funds (bridge loans) are stuck with the long term financing. What they thought would be a 6 to 9 month loan is now looking like several years...at high rates.
I could go on, but no doubt have rambled enough. There have been a couple more big deals announced this week. I wonder where the debt will come from.
These things run in cycles. Wall Street got a little carried away. Bear Stearns is taking a huge hit on two of their hedge funds. Before you comment "so what, the rich can afford losing money" realise that the majority of hedge fund customers are pension plans, which affect UAW, Teamsters, UTU, etc.
So, in answering your foreclosure question with a question right back to you....would you want to foreclose on property right now? or take the added risk that it could be worked out?
Also, I believe at some point China will take a look at US railroading, particularly if the rate structure gets too far out of hand on containers. Doubtful if they will be allowed to purchase an entire railroad (possibly the KCS), but they may make a sizeable investment.
They recently purchased 9.9% of Blackstone Partners (Wall Street Alternate Investment Fund) with their folding money.
KCS would be an interesting play since they now have the deep water port in Mexico. It would be a long slow route to the midwest, but so are the ocean container boats. Ever wonder why Union Pacific holds on to the St. Louis Chicago ex GMO line? It would give KCS access to Chicago.
ICE plus KCS would give a market to Chicago, plus all that coal with the DME. Just a thought while lookin at the wall map.
erikem wrote: MP173 wrote: 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.Wonder how much of the change in the debt market is due to problems with the mortgage industry? My impression is that industry is leaning more towards taking some small losses with the problem loans than cutting their own throats by increasing foreclosures.I rather think the change with the debt markets will be good for the RR's in the long run - management will be concentrating more on running a railroad than aspiring for a buyout.
MP173 wrote: 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.
I dont think Railroads do mortgage.
Safety Valve wrote: erikem wrote: MP173 wrote: 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.Wonder how much of the change in the debt market is due to problems with the mortgage industry? My impression is that industry is leaning more towards taking some small losses with the problem loans than cutting their own throats by increasing foreclosures.I rather think the change with the debt markets will be good for the RR's in the long run - management will be concentrating more on running a railroad than aspiring for a buyout. I dont think Railroads do mortgage.
I wasn't saying that the RR's were doing mortgage. My point was that the shift in the debt market in the last few weeks might have originated from problems in the mortgage market (and as MP173 pointed out, has been a "train wreck" waiting to happen for the last 4 to 5 years). The related point was that the collapse of the debt market supporting the LBO's is probably good for the RR's in the long run - my gut feeling is that a LBO of a railroad would be a disaster for all concerned - something like what happened to the Espee after Anschutz bought it.
MP173 wrote:So, in answering your foreclosure question with a question right back to you....would you want to foreclose on property right now? or take the added risk that it could be worked out?
IMHO, the better course seems to be taking the risk to work things out - and the news reports about the real estate market have been pointing to efforts to avoid massive foreclosures by lenders and local governments. I've heard plenty of horror stories of abusive lending practices.
For what it is worth, a lot of the consumer sales were being driven by people thinking that they were getting rich from rapid increases in their home equity (including lotsa home equity loans). I rather suspect that consumer spending will be dropping (if it hasn't already) and that will have a negative impact on carloadings (to keep this thread somewhat on topic).
erikem:You bring up an interesting point about SP and Ansschultz purchase. I know very little about the SP, so I cannot really comment on that purchase. Can you discuss that some? It is my understanding (very limited) that SP was pretty much in freefall prior to Anschultz purchase.
Mark Hemphill had an excellent article on the SP's fall in That 70's issue of Trains back a few years ago. The failure of the Santa Fe merger seemed to just gut SP, both from a operations standpoint. Also, didnt Santa Fe walk away with considerable non rail assets from that failed merger?
erikem wrote:- something like what happened to the Espee after Anschutz bought it.
- something like what happened to the Espee after Anschutz bought it.
And look what it got him --- 50% of the UP
edbenton wrote:Basically the Santa Fe took everything but the RR from the Southern Pacfic Corp when the Merger was denied by the ICC and the DRG&W bought the SP from them. The only thing the Rio got was the RR the Santa FE got the rest.
Basically???? Totally! If there wasn't an operating railroad on the right-of-way or ancillary properties, ATSF got it. Pipelines. Trucking Companies. Steamship line (American President Lines now known as APL had a large stock block owned by SP). High-speed telacomunications company (SPRINT). Retained Land Grant properties. On and on and on.
It was these non-railroad assets that paid the railroads bills. Had for quite a while (IIRC since about 1950 or so). These assets paid for the re-building of the Lucin cut-off; built West Colton Yard and the new line down Cajon. CTC for the entire railroad starting in the 1960's (project nearly got completed). Almost got the double tracking of the Sunset started -- almost. After the rebuild, raised the entire Lucin cut-off when the Great Salt Lake level rose and started to flood out the line (detoured trains around the South end of the Lake via the WP for a LONG time).
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