Railcar industry watching for M&A impact from recovery

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As large North American railcar companies chug out of the economic trough and scores of railcar component-makers ask Congress for a stimulus package, some in the industry are predicting or positioning for consolidation opportunities.

Among them, American Railcar Industries (NASDAQ: ARII) is keeping cash on hand for bolt-on opportunities, Amsted Rail continues to pursue international acquisitions, and Greenbrier (NYSE: GBX) sees itself positioned well to participate in any industry consolidation movement, executives of each company told mergermarket.

After an “abysmal” decline, railcar manufacturers and suppliers are on the cusp of “one hell of a bang coming up” in demand for their goods, as railways and shippers begin to replace or refurbish roughly 200,000 cars that have been idle during the slump, out of a North American fleet of 1.5m, said consulting economist Peter Toja, president of Economic Planning Associates.

Railcar deliveries dropped 81% in Q4 2009 from a year earlier, with roughly 10,000 car deliveries projected for 2010, unless Congress provides the industry stimulus relief, according to lobbying materials provided by the Railway Supply Institute (RSI). Delivered cars numbered about 75,000 in 2006, by RSI calculation.

Congress is now being lobbied to make a USD 813m tax-credit stimulus available for up to 250 companies that make railcar axles, brakes and other components, according to Nicole Brewin, legislative coordinator for RSI. The RSI supports passage of the “Green Railcar Enhancement Act” (GREA), which would provide a 25% tax credit for each qualifying railcar, in an effort to recoup up to 50,000 US jobs by drawing future demand into 2010-11, according to several advocates, all of whom made clear the bill’s survival is far from certain. GREA would only add to federal influence over rail, which is already awaiting further developments on tax, energy and environmental issues.

Amid such vagaries, American Railcar Industries (ARI), based in St. Louis, Missouri, plans to keep roughly USD 320m in cash, which resulted partly from USD 275m in notes issued earlier, rather than pay down debt, in order to fund bolt-on acquisitions if opportunities arise, according to CFO Dale Davies. ARI chairman Carl Icahn and the company’s board made that decision, Davies said.

During the company’s recent 2Q conference call, CEO James Cowan said the company intends to diversify domestically and expand internationally. ARI’s market cap was nearly USD 244.9m this afternoon. ARI hears from bankers continually about opportunities, but has not retained advisors, Davies said, adding the company is not “going to be looking at anything major”. A repeat of ARI’s unsuccessful 2008 attempt to acquire Greenbrier is unlikely, said Davies, adding “that’s kind of been done.” ARI has dedicated considerable resources to joint ventures in the US and India, Davies noted.

Asked whether Greenbrier sees further consolidation ahead in the railcar or supplier markets, Mark Rittenbaum, EVP, recently responded that he “would not want to speculate on what may or may not happen in the industry and we are focusing on our business as it stands today. However, if there ever were to be any kind of consolidation or roll-up, we are comfortable with our position and strategy, and believe we would be a natural participant.” William Furman, Greenbrier’s CEO, collaborated with RSI in creating the GREA coalition, according to Jim Beall, who serves the coalition in his role as managing partner of Ball Janik’s government-affairs practice in the District of Columbia. Greenbrier makes and refurbishes railcars in the US and in Poland, according to the company’s website.

The six major North American railcar manufacturers are category leader Trinity Industries (NYSE:TRN); FreightCar America (NASDAQ:RAIL); Hamilton, Ontario-based National Steelcar; Union Tank Car, backed by Warren Buffett and Berkshire Hathaway-controlled Marmon Group; as well as ARI, backed by Icahn Enterprises (NYSE:IEP); and Greenbrier Companies, which is backed by Wilbur Ross’s WL Ross.

“Some would argue you don’t need six [US] railcar manufacturers,” and that three to five would be sufficient, said John Wories, president of Amsted Rail, the major component supplier based in Chicago, Illinois. Asked which railcar companies might be candidates for acquisition, he replied, “I would decline to comment,” adding “every one of these folks are my prime customers.”

Meanwhile, Wories said he believes the US major supplier ranks have been cut to 20 from twice that number several years ago. Once a component manufacturer is shuttered, it becomes very difficult to reopen that operation, he said. “The economics become overwhelming.”

Amsted, itself, completes up to six acquisitions internationally each year using entirely internal staff, said Wories. Amsted’s international revenue – earned mainly in Brazil, Russia, India, China (BRIC) -- has allowed the company to weather the decade’s slump, and the company has long manufactured components in the nations it serves, Wories said. He declined to provide details of acquisitions.

M&A continues: In June, for example, an affiliate of PE QuadC Management joined with the management of A. Stucki, the provider of railcar construction and repair products, to buy Stucki, allowing the exit of investor-lender Gladstone Investment. The equity transaction was valued at USD 21.7m, according to a Gladstone release.

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