Wisconsin Central May Be Headed for a Sale

Wisconsin Central Transportation Corp. has retained Goldman, Sachs & Co. to explore strategic alternatives, including a sale of the company. And though the $760 million-market-cap company could see a sale, one analyst believes a takeout price might not be very high. Wisconsin Central shares closed at $14 on November 30 on Nasdaq, compared with a 52-week range of $9.81 to $16.13. Wisconsin’s decision to explore alternatives comes at a time when Ed Burkhardt, the founder and former CEO, has launched a proxy fight against the company. Burkhardt was ousted from the company in July 1999. Rosemont, Ill.-based Wisconsin operates nearly 3,000 railway route miles. Through its primary subsidiaries Wisconsin Central Ltd., Fox Valley & Western Ltd., Sault Ste. Marie Bridge Co., and Algoma Central Railway Inc., the company provides industrial rail services in Wisconsin, Illinois, Minnesota, Michigan’s Upper Peninsula, and Ontario, Canada. “The real question,” said Donald Broughton, an equity analyst at A.G. Edwards & Sons, “is how do you fix the English, Welsh & Scottish [Railway Holdings Ltd.] property, where Wisconsin owns a 42.5% stake. English, Welsh & Scottish (EWS) is the largest rail freight services provider in Great Britain and has had difficulties with Railtrack Group PLC. Railtrack is the owner of the U.K.’s rail infrastructure and gains most of its revenue from fees paid by freight operators and passenger-train companies. Railway, EWS’s largest customer and supplier, is seeking an increase in track access income from freight operators such as EWS. What makes things difficult for EWS is that “Railtrack can introduce competition into the equation when Railtrack is the customer and [EWS is the supplier] and serve as EWS’s sole source supplier when Railtrack is the supplier,” Broughton said in a November 3 report. Regardless of whether Burkhardt or Wisconsin CEO Thomas Power gains control of the company, its takeout price on a per-share basis would not be significantly higher than where the stock is trading at now, if EWS is not addressed, Broughton said. That said, Broughton believed that all of Wisconsin’s properties, from its New Zealand to its EWS assets, could fetch a price of roughly $14.88 a share, or $730 million, in a takeout. Nearly $12 of that price is based on the company’s domestic operations, at a multiple of 10 times EBIT, Broughton said. Canadian National Railway Co. and CSX Transportation Inc. would be interested in Wisconsin, primarily for its domestic operations, he added. Broughton also said that Burkdhardt’s proxy fight was somewhat ironic, given that the initiatives Burkhardt wants to accomplish, from stock repurchasing to putting up the “domestic operations for a strategic sale,” Wisconsin has already started or is in the process of doing so. Moreover, Burkdhardt’s proposal to spin off or liquidate Wisconsin’s international investments is curious, as they have “little hope of realizing their potential and will be a continuing drag on consolidated earnings,” Broughton said. The investments were his idea in the first place, he explained. “If he couldn’t fix them during his watch, we wonder why shareholders should trust his Monday morning quarterbacking’ now,” Broughton said in his report. For the third quarter, Wisconsin earned $15 million on revenue of $96 million, compared with year-earlier earnings of $16 million on revenue of $92 million.