Florida East Coast to Go Private in $3.5 Billion Deal

Article excerpt

Byline: MARK BASCH

For the fourth time since Henry Flagler began building it in 1883, the Florida East Coast Railway is changing hands.

The railroad's parent company, Jacksonville-based Florida East Coast Industries, announced Tuesday a $3.5 billion agreement to sell the company to a group of private equity funds managed by New York-based Fortress Investment Group LLC.

Florida East Coast shareholders will get $84 in cash for their shares, a 13 percent premium over the stock's closing price of $74.13 on Monday. The price consists of a special $21.50 dividend that will be paid by the company and $62.50 in cash paid by the investors.

Florida East Coast traces its roots to the railroad built by Flagler from Jacksonville to Miami in the late 19th century. In the mid-1980s, it took advantage of land owned by the railroad to add a commercial real estate subsidiary now known as Flagler Development Group.

In an interview Tuesday, Chairman and Chief Executive Adolfo Henriques said he does not expect changes at the railroad or the real estate company because of the buyout, other than the transfer from public to private ownership.

"We will continue to operate as we've been operating before," he said. Henriques plans to stay on as CEO.

He said Fortress plans to continue operating both the railroad and the commercial real estate business together, with the headquarters in Jacksonville. The real estate subsidiary develops and operates properties mainly in the Jacksonville, Miami and Orlando markets.

Fortress is an international firm with $35.1 billion in assets under management. The firm went public in February and is traded on the New York Stock Exchange under the ticker symbol "FIG."

Fortress spokeswoman Lilly Donohue did not return two phone messages Tuesday.

Florida East Coast represents Fortress' second recent investment in the railroad industry. In February, its funds acquired Boca Raton-based RailAmerica Inc., which operates 42 short line and regional railroads in 26 states. It does not operate a railroad in Florida.

The agreement to buy Florida East Coast is the second major buyout of a Jacksonville company announced this week. On Monday, BAE Systems Plc announced a $4.1 billion deal to buy Armor Holdings Inc.

And just like in the Armor deal, there were some indications in the market that word of the Florida East Coast deal may have leaked. Bloomberg News reported Tuesday that there was a big increase last week in trading in options to buy Florida East Coast shares. Bloomberg reported similar activity Monday regarding Armor.

"A little bird whispered in someone's ear," Kerk Securities trader Todd Wilemon told Bloomberg regarding the Florida East Coast deal. "People start talking and sometimes they'll let it slip."

In addition to the options activity, Armor's stock price rose sharply late last week. Florida East Coast's stock has been rising gradually from the low $60s since early April.

Henriques said he could not comment on the options trading.

Morgan Keegan & Co. analyst Arthur Hatfield said shareholders are getting a good price for their stock in Florida East Coast. In a research note Tuesday, he said his "sum-of-the parts valuation" on the company was $65.99 a share, not including potential value of other projects under consideration.

"We believe a price of $84 per share is a fair value, giving shareholders value for the current company and discounted value for the aforementioned projects," Hatfield wrote.

Florida East Coast's stock actually rose above the acquisition price Tuesday, reaching as high as $85.75 and closing at $84.91, up $10.78 on the day.

That could suggest investors expect a higher bid. But "given the unique nature of the company, we are not speculating that a strategic bid will emerge," Hatfield said. …