Japonica
Partners discovered a significant "Value Gap" between Chicago
Northwestern Railroad's ("CNW") trading price and the potential
value of the company's shares. Upon revealing an almost 9% pre-control
stake, Japonica contacted CNW and, as a proactive white knight,
sought to create value through changing both the internal and
external expectations and executing a superior business plan.
Japonica approached CNW intending
to work with management as "Partners in Progress" to maximize
shareholder value. Japonica met frequently with senior executives,
including the CEO, who assisted Japonica's team in discovering
additional Nuggets of Value. In addition, the investment required
extensive governmental and regulatory negotiation and management
skills. To solicit the necessary support, Japonica worked closely
with the U.S. House of Representatives and Senate, numerous
state governments, the U.S. Department of Transportation, and
the Interstate Commerce Commission. Additionally, Japonica's
special core competency of changing cultures & operations
were tested successfully with the efforts of numerous separate
railroad-related unions.
Prior to Japonica's investment,
CNW's return to shareholders had been disappointing, and it
was trading at a significantly lower multiple than its peers.
A management buyout offer of approximately $30 per share, sponsored
by one of the largest and most reputable buyout firms, had recently
collapsed. The investing public shared management's negative
assessment. Investment bankers were so troubled with the company's
performance that CNW was openly referred to as "two strips of
rust running into the sunset."
Despite Japonica's entrepreneurial
efforts to partner with management to increase value, CNW's
board prohibited management from implementing Japonica's business
plan. Therefore, Japonica proposed its own slate of outside
directors to assist management in working constructively toward
closing the Value Gap. Concurrently, based upon the quality
of its analytical work, business plan, and management team,
Japonica arranged a fully financed $1.6 billion tender offer.
Ultimately, outside advisers persuaded senior management to
pursue an auction process for the sale of the company. A competing
consortium of firms, including a major U.S. railroad and private
equity firm, offered a price significantly above Japonica's
premium offer.
Japonica began acquiring CNW
shares at $22. The rival consortium launched a $50 competing
tender. With Japonica acting as a catalyst, CNW shareholders
doubled the value of their investment, and total shareholder
value increased by approximately $400 million from the point
when Japonica first privately contacted management.
Japonica and its team of approximately
60 entrepreneuers, including former executives from IC Industries,
Florida East Coast Railroad, Consolidated Natural Gas, and the
U.S. Department of Transportation, dedicated an estimated 22,000
work hours to the co-investment and produced approximately 3,000
pages of analyses.