Largest stockholder in one of the largest railroad holding companies in North America, CNW Corp., commenced US$1.6 billion white knight tender offer and full board proxy to maximize shareholder value.
An equity investment via open market stock purchases and subsequent sale resulted in a 79% IRR and a TVPI of 1.55x in 1.5 years with no leverage.
Management, the markets, leading research analysts, and one of the nation’s largest buyout funds that terminated its buyout at about one-third the price that JP sold its stock all believed it was impossible for CNW to thrive and indeed could not survive in the coming decade.
CNW Corp. had transportation assets located primarily within North America, but interfaced with trading partners worldwide, handling a diverse range of products, including automotive, natural resource, and agricultural products, as well as manufactured goods. A leading transportation holding company suffering from a loss of passion for innovation and performance, CNW was deemed a “strategic asset” by several US government entities given its key transportation infrastructure supporting both critical commercial supply routes and public transportation pathways. Approximately 9,000 employees.
The prevailing view of CNW among the most sophisticated investors in the sector was that the CNW was heading for bankruptcy, a proposed buyout with a leading private equity firm had just collapsed, management publicly displayed a depressing outlook for the company, and the most respected financial analyst in the sector had coined the often repeated phrase that “CNW was nothing more than two strips of rust going into the sunset.” Japonica’s team with years of hard work discovered a long list of systemic misconceptions grouped into five segments. Each discovery was supported by Japonica’s building of balance sheets and full financial statements for what Japonica believed should be the five segments of CNW’s business. CNW financials that reflected economic reality showed the potential for a significant reversal of the relationship between accounting income and free cash flow.
Supported by almost a decade of work in the rail transportation sector, Japonica assembled a team of approximately 70 entrepreneurs and niche specialists who worked for almost 15 months discovering value gaps based on hidden nuggets of value and transformational business plans. Japonica’s analysis showed a low risk high return investment with a growing CNW cash cushion that protected our downside risk and a potential fair valuation at a multiple of our entry price.
Japonica created value by rescuing CNW from both a failed takeover and failed business model, and developing a transformational business plan, pioneering a joint tender-offer/proxy strategy that won major stakeholder endorsements, and compelling one of CNW largest customers/competitors to buy CNW at above our target value. Through relentless education, Japonica convinced management to embrace a new business plan that resulted in the market increasing the stock price of CNW from a low of approximately $17 per share to a $50 per share exit price in a record period of time.
CNW had a value destructive culture rooted in civil war military hierarchy, confrontational labor relations, and abject disregard for the environment and its stockholders. Japonica proposed a culture based on respect for all stakeholders and company-wide mission to create a world-class transportation company.
At the core of Japonica’s plan to create extraordinary value was operations research (OR) based technologies to extract vastly greater yield from CNW personnel (16 labor unions), mobile stock, and fixed property assets. With CNW’s extensive intermodal operations and diverse rolling stock, re-training in OR best practices from other transportation sector leaders, such as DHL, Fed Ex, Maersk, and ICG, offered the opportunity to improve customer service and – at the same time – create shareholder value with minimal capital investment. Other technologies that were implemented included central managed cash flow and cash balances, re-organized client-sales person management, and capital expenditure re-prioritization based on long-term financial analytics.
Regarding ESG for CNW, Japonica was a proactive white knight working to transform a company described as “two strips of rust running into the sunset” and rescue the company from a potentially highly destructive leveraged buyout. Japonica’s tender offer for 100% of the company and the associated proxy slate board of directors was stakeholder inclusive embracing multiple unions, community entities, customers, and environmental activists.