(Bloomberg News circulated the following story by David Mildenberg on May 8.)
ATLANTA — Fortress Investment Group LLC, the first U.S. manager of private equity and hedge funds to go public, agreed to buy real estate developer and railroad operator Florida East Coast Industries Inc. for $3.5 billion.
The $84-a-share offer represents a 13 percent premium over yesterday’s $74.13 closing price for Jacksonville, Florida-based Florida East Coast, the company said today. Investors pushed up the shares to 1 percent more than the proposal from New York- based Fortress, suggesting another bidder may emerge.
The purchase would expand Fortress’s real estate and railroad holdings through a company that has been investing in Florida’s tourism and agriculture industries since the 1880s.
“I would have thought it would go for a higher price,” said Thomas J. Herzfeld, chairman of Herzfeld Caribbean Basin Fund in Miami, which held 40,500 of the shares as of Dec. 31. Warren Buffett’s recent comments have buoyed railroads, he said.
The company’s largest investor, Franklin Mutual Advisers, is evaluating the offer, Franklin Mutual Chief Executive Officer Peter Langerman said. Funds managed by Franklin Mutual, a unit of Franklin Resources Inc., hold a 32.6 percent stake in Florida East Coast, according to data compiled by Bloomberg.
“We believe this is an opportune time to capitalize on the unique assets owned by Florida East Coast,” Langerman said in an e-mailed statement.
Options Surge
Today’s announcement came after call options to buy Florida East Coast shares surged last week to the most ever, rising 24- fold to 1,888 contracts on April 30 and reaching 4,722 contracts by May 2. Call options give investors the right to buy shares at a specified price by a certain date.
Shares of Florida East Coast rose $10.78, or 15 percent, to $84.91 at 4:03 p.m. in New York Stock Exchange composite trading. Shares of Fortress increased 29 cents to $30.07. They have gained 63 percent since they began trading on Feb. 8.
The sale agreement calls for shareholders to receive a special cash dividend of $21.50 for each share from Florida East Coast, and $62.50 in cash from Fortress. The companies expect the transaction to close in the third quarter.
“Conventional wisdom” holds that a closing price higher than the bid signals that investors expect another offer, said Ira Rosner, a lawyer in Miami with Greenberg Traurig PA, who was Florida East Coast’s lead attorney. “I’m in no position to judge.”
Three Weeks of Talks
Florida East Coast had been considering a sale since 2006, and the talks with Fortress took only three weeks, Rosner said. “There’s been a very extensive process here in an effort to maximize shareholder value.”
Calls to Fortress spokeswoman Lilly H. Donohue weren’t returned.
Fortress expanded into railroads with the $1 billion acquisition in February of RailAmerica Inc., a regional-railroad operator based in Boca Raton, Florida. The investment firm has $35.1 billion under management and has doubled its assets since 2005.
Florida East Coast operates a railroad along a 351-mile corridor between Jacksonville and Miami initially assembled in the 19th century by Henry Flagler, one of the founders of Standard Oil Co. with John D. Rockefeller.
The company also was controlled for decades by Edward Ball, a financial manager for the DuPont family estate who assembled large tracts of land in Florida, said Benjamin Bishop Jr., chairman of Jacksonville-based investment firm Allen C. Ewing Co. The firm doesn’t own any Florida East Coast shares.
`Smart Plan’
“There’s a lot of future developable land along Florida’s rail tracks,” while office and industrial rents are increasing after a lull, Jack McCabe, chief executive officer of McCabe Research & Consulting LLC, a consulting firm in Deerfield Beach, Florida, said in an interview. “To me it looks like a pretty smart plan at a pretty good price for Fortress.”
Florida East Coast’s Flagler Development Group unit controls about 8.6 million square feet of office and industrial space, with an additional 1.9 million square feet under construction.
Morgan Stanley served as Florida East Coast’s financial adviser. Skadden, Arps, Slate, Meagher & Flom LLP advised Fortress.
U.S. railroad shares rose last month after Buffett disclosed his 10.9 percent stake in Burlington Northern Santa Fe Corp. and CSX Corp. said hedge fund TCI Fund Management LLP had taken a “significant” holding and planned to buy more than $500 million in stock.
The Standard & Poor’s 500 Railroads Index, which consists of the four largest U.S. railroads and doesn’t include Florida East Coast, gained 8.9 percent in April.