Icahn Sees Second-Time Charm as Greenbrier Value Falls

Monday, 03 Dec 2012 12:35 PM

 

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For Carl Icahn’s pursuit of Greenbrier Cos., the second time could be the charm after the railcar maker fell to its lowest valuation in six years.

Icahn disclosed a 9.99 percent stake in Greenbrier last month and sought to discuss options with management four years after dropping an attempt to link up the company with American Railcar Industries Inc. The activist investor resurfaced after a more than 40 percent drop in the shares left Lake Oswego, Oregon-based Greenbrier at its cheapest price relative to earnings since 2006, according to data compiled by Bloomberg.

The undervalued stock is luring Icahn back to Greenbrier at the same time that railcar demand picks up from customers such as energy companies, according to Stephens Inc. A combination of Greenbrier and American Railcar, in which Icahn has a controlling stake, would overtake Trinity Industries Inc. as the industry leader with more than a third of the market and allow the merged company to cut overhead expenses, said Susquehanna International Group LLP.

Icahn “does have a better case now than in 2008,” given the stock drop, Patrick Nolan, a Stuart, Florida-based analyst at Penn Capital Management Co., said in a telephone interview. A merger “would be good for the industry on a pricing level, and then it would also be good for the two companies because you put a better management team with American Rail at the helm of Greenbrier and run it more efficiently.”

Penn Capital oversees about $7.3 billion, including Greenbrier and American Railcar shares.

‘Strategic Opportunities’

Mark Rittenbaum, Greenbrier’s chief financial officer, didn’t return a phone message or e-mail seeking comment on whether his company would be open to a sale or has held talks with Icahn or American Railcar about a potential deal.

Susan Gordon, a spokeswoman for Icahn, said he was traveling and unavailable to comment. Dale Davies, CFO of American Railcar, didn’t return a phone call seeking comment on the prospects of a deal with Greenbrier.

Greenbrier, with a market capitalization of $519 million and sales of $1.8 billion in the fiscal year ended in August, makes railcars and equipment as well as freight barges. The company also provides leasing and other services, such as repairs and maintenance.

On Nov. 13, Icahn disclosed in a regulatory filing that he took a 9.99 percent stake in Greenbrier, saying the shares are “undervalued,” and that he sought discussions with management “possibly relating to strategic opportunities.”

Second Time

Greenbrier said Icahn contacted Chief Executive Officer Bill Furman about the investment, without suggesting any specific proposals or timetable for future talks. The company said it “remains committed to enhancing shareholder value and to maintaining an open dialogue with its shareholders.”

The billionaire investor took a similar stake in Greenbrier in February 2008, suggesting then that the company and American Railcar, in which he held a majority stake, hold merger talks. The discussions broke off in June that year due to “certain unresolved issues,” Icahn said at the time, and he later cut his stake in the company.

Icahn built up his latest position in Greenbrier as the stock slumped after the company reported fourth-quarter earnings that missed its own expectations and new railcar deliveries were forecast to fall in fiscal 2013.

On Nov. 5, Greenbrier shares fell to $13.40, giving the company an enterprise value that was 5.39 times earnings before interest, taxes, depreciation and amortization in the previous 12 months. That was the cheapest since August 2006, according to data compiled by Bloomberg.

Recovery Bet

Even after surging on news of Icahn’s investment, the shares ended last week at $19.11, still 21 percent lower than at the start of the year.

Greenbrier’s undervalued shares have reignited an opportunity for Icahn to pursue a merger of Greenbrier and American Railcar, said Brad Delco, a Stephens analyst based in Little Rock, Arkansas. While the railcar makers couldn’t expand output fast enough in the past year to keep up with demand to haul sand used by oil and gas producers to extract fuel from shale rock, the manufacturers are still in the beginning stages of a recovery, he said.

“It probably was a good decision on his part not to double down on a cyclical business in 2008, right before the downturn,” Delco said in a phone interview. “We haven’t necessarily seen a robust recovery at this point, so by combining the businesses now, you have the potential that there are still some good years ahead that a combined business could operate in.”

‘More Competitive’

A tie-up would also help diversify the companies, which don’t have a lot of overlap, he said.

American Railcar, with a market value of $656 million, focuses on tank cars, which transport everything from vegetable oil to crude and chemicals, and hoppers for handling bulk items such as sand and grain. Greenbrier makes intermodal railcars, which move containers often carrying consumer goods that can travel by a combination of train, truck and ship. It also builds partition cars for hauling lumber as well as tank cars.

Together, Greenbrier and American Railcar would have a 36 percent share of the railcar market, vaulting past the current leader, Trinity Industries at 31 percent, said Bascome Majors, a New York-based analyst for Susquehanna. The business could also cut overhead costs by letting go of some of the management team, Majors said.

“If you combine the companies, fundamentally you create a larger entity that’s more competitive across the entire product spectrum,” he said in a phone interview. “This would create a competitor of similar scale to Trinity. The low-hanging fruit is synergies at the management headquarters level.”

Antitrust Concerns

The challenge to a deal would be obtaining regulatory clearance because competitive concerns could cause regulators to scrutinize the combination, Majors said.

“On paper it makes sense, but it’s difficult to determine how antitrust might respond,” he said.

Still, railroad rivals have combined in the past without running into regulatory roadblocks. Trinity Industries, which has a market value of $2.5 billion, acquired closely held Thrall Car Manufacturing Co. in 2001, according to data compiled by Bloomberg. Trinity secured early termination for the Hart-Scott- Rodino Act waiting period less than two months after agreeing to buy Thrall for at least $364.1 million in cash and stock.

Combining Greenbrier with American Railcar may be the next logical step for an industry that’s already consolidating, said Nolan of Penn Capital.

“There’s one more merger left between the top players, and I think these two are the most strategic fit to make that happen,” Nolan said.

© Copyright 2014 Bloomberg News. All rights reserved.

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