Icahn Has Another Go At Greenbrier (ARII, GBX, TRN, IEP, UNP)

By Stephen D. Simpson, CFA | December 18, 2012 AAA

If Bravo ever needs to recast "Millionaire Matchmaker," their producers ought to consider giving Carl Icahn a call, as it seems like Icahn likes nothing more than to try to land opportunistic M&A deals. In his latest attempt, Icahn is proposing (via his listed company Icahn Enterprises LP (Nasdaq:IEP)) that his majority-held American Railcar Industries (Nasdaq:ARII) acquire fellow railcar builder Greenbrier (NYSE:GBX). As is so often the case with Icahn-proposed deals, though, the deal is long on logic and short on value for the selling shareholders.

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The Deal That Could Be
Icahn has proposed (through a 13D filing) that American Railcar Industries (in which he controls) acquire Greenbrier for $542.9 million. That works out to about $20 a share - a modest 5% share to Monday's close, but a far more considerable premium of about 36% to the point where the market learned of his nearly 10% stake in Greenbrier.

Let's Try It Again
This isn't the first time that Icahn has tried to combine American Railcar and Greenbrier. He tried back in 2008, but couldn't get the deal done. It's also worth noting that the price prior to the collapse of that attempt (in June of 2008) was about 25% higher than this bid.

While the operating environment for Class 1 railroads like Union Pacific (NYSE:UNP) has indeed been healthy in the intervening years, that hasn't really translated to consistent success or prosperity for Greenbrier. With demand for grain and intermodal cars looking weak for 2013, and the company spending many trying to ramp up more tanker car production, these shares have had a rough year (likely prompting Icahn to build his stake).

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A Very Logical Deal
Leaving aside the deal value, this deal makes a tremendous amount of sense. Railcar builders like American Railcar, Greenbrier, Trinity Industries (NYSE:TRN) and FreightCar America (Nasdaq:RAIL) have long struggled to manage the ups and downs of the railroad capex cycle, and that has left their shareholders strapped in for some pretty wild rollercoaster rides over the last 10 or 20 years.

Putting these two companies together makes a lot of sense. Greenbrier has generally focused on double-stack intermodal cars, grain hoppers and conventional boxcars and gondolas. Importantly, Greenbrier has stayed clear of coal cars, though the company's ocean and river barge business does address the coal market. For American Railcar, their business has largely been more focused on specialty hoppers and tank cars.

With Greenbrier holding about one-quarter of the market and American Railcar holding another 12% or so, combining these two companies would give them scale on par with Trinity and considerably more leverage in dealing with buyers like the railroads and big fleet lessors like General Electric (NYSE:GE). I would also expect significant sourcing and production efficiencies; Greenbrier's profit forecasts have recently come under pressure in part from efforts to transition to greater tanker car production, and these two business together would likely be more efficient and effective in reallocating production priorities.

SEE: Analyzing An Acquisition Announcement

Value Is the Catch
The "but" with this deal is the price that Icahn proposes. Icahn rarely ever offers to pay full value (at least not at first), and this deal is no exception. While it is indeed true that Greenbrier stock has struggled and near-term profit expectations have nose-dived, I believe a strong case can be made that the company's long-term operating fair value is in the low to mid $20s. Add in a control premium and I believe that a fair price for Greenbrier falls in the mid to high $20s (say, starting at $25).

I don't fault Icahn for looking for the best deal he can find for himself and his shareholders - why pay $21 if $20 will get the job done? That said, I believe the production/manufacturing advantages and operating synergies (a large piece of Greenbrier's $100 million in SG&A expenses should go away) do allow him (or American Railcar, to be more precise) to offer more and still generate worthwhile long-term returns from this deal.

The Bottom Line
Time will tell how this deal proceeds. As of this writing, Greenbrier management had yet to comment on the bid, but premarket trading doesn't seem to anticipate a substantially better offer. At a minimum, if I were Greenbrier management I'd put in a call to Berskhire Hathaway (NYSE:BRK.A, BRK.B) and see if Warren Buffett had any interest in acquiring Greenbrier and combining it with his Union Tank business. While I realize that Greenbrier investors may regard this offer as a good exit strategy for an investment that has not done particularly well this year, I'd be reticent to sell below fair value and I'd push management to demand at least a few more dollars per share from Icahn before saying yes to the deal.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

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