Blackstone Sells GLT, Now The Wait Begins –

The Blackstone Group waited 15 years before selling its stake last month in U.S. Steel spin-off Transtar, a railroad and Great Lakes shipping company. But the $380 million sale to Canadian National Railway Co. (CN) won’t likely be finalized for another six to nine months, as CN seeks U.S. regulatory approval.

Renamed Great Lakes Transportation after Blackstone took full ownership, the company raked in more than $217 million in revenue last year, while CN reported revenue topping $4.6 billion. Year-to-date, CN has recorded $496 million in profit on $2.9 billion in earnings, with long-term debt of $4.5 billion. The purchase places CN’s debt leverage at approximately 41%, according to the ratings services.

According to a source close to the buyout shop, Blackstone isn’t discussing the transaction until the deal closes, but a source at CN said the all-debt transaction price was approximately six times EBITDA.

In order for Blackstone to cash in the sale, approval must come from the U.S. Surface Transportation Board (STB), the U.S. Maritime Administration (USMA), the Federal Trade Commission (FTC), the Department of Justice’s (DOJ) Antitrust Division and the U.S. Coast Guard (USCG). And that’s not all. In order to get around Jones Act restrictions, CN will hire a third party to manage the operation of GLT’s lake-going vessels.

(The Jones Act, or The Merchant Marine Act of 1920, requires all water transportation of goods between U.S. ports be on U.S.- built, owned, crewed, and operated ships.)

The Deal

While the auction Goldman Sachs put together for the firm to sell GLT never turned into a bidding war, the sale caught the interest of many private equity shops, including Alliance Resources Group, Apollo Management, Bain Capital, Berkshire Partners, Brera Capital Partners, The Carlyle Group, Caxton-Iseman Capital Partners and Evercore Partners.

Strategics shopping for this add-on included Burlington Northern Santa Fe Railway, CP Rail, CSX Corp., Norfolk Southern Corp., Union Pacific Corp., and RailAmerica Inc.

In the end it came down to three buyout shops-Evercore, Brera and Caxton-and the lone strategic, Canadian National. “We did get more than one bid, but after receiving them decided to go with CN instead of going back and forth,” said a source close to the deal.

Among various assets, including thousands of train cars, hundreds of locomotives and scores of vessels sailing the Great Lakes, arguably the most important piece of the deal for CN was a strip of railway roughly the length of Manhattan, situated between two sets of CN tracks-one coming from the steel mills, the other from the Great Lakes. The GLT strip now connects the two lines, and turns CN from a tenant into an owner for the entire span.

According to Mark Hallman, media liaison for CN, the purchase points to the optimistic view that the U.S. steel industry is turning around. “This is an opportunity for us to partner with the steel industry when it’s getting its act together,” he said. LBO shops played two important roles for what CN officials see as a boon for them. Blackstone sold CN the needed assets to gain a stronghold in the region, and buyout shops such as W.L. Ross betting on a steel industry turnaround may pump up production enough to revive the entire Great Lakes region.

The History

In October 1988, Blackstone teamed with management to purchase Transtar Inc., the transportation arm of U.S. Steel, in a $600 million leveraged buyout. U.S. Steel carved out Transtar in lieu of Carl Icahn’s attempt at a hostile takeover of the steel making giant, in an attempt to sell off $1.5 billion in assets. The deal gave Blackstone a 51% share in Transtar, management a 44% share, and U.S. Steel held onto the remainder. The deal included 4,000 employees, 2,000 miles of track, 300 locomotives, 20,000 train cars, 12 lake vessels, 305 barges and 27 tugboats. Revenue in 1987 topped $387 million.

Fast forward to March 2001. Blackstone and Transtar management split the company in two, with Blackstone walking away the owner of four of the nine shipping entities. While no equity changed hands, the deal gave Transtar and Blackstone each sole ownership of half the company. Blackstone then renamed its portion Great Lakes Transportation.

Not only could this deal be a sign that perhaps strategic buyers are gathering up the gumption to come back to the buyout table, but it could also be a small part in the revival of a Rust Belt-Great Lakes region that’s seen tough times measured in decades, not years.

In unrelated railroad news, Blackstone is reportedly teaming up with CVC Capital Partners and Bain Capital in an attempt to purchase Deutsche Bahn AG’s chemicals distribution business, which some speculate could draw offers as high as $1 billion. The auction for the German rail operator’s Brenntag division has been ongoing for many months, according to reports.