Let’s Talk About Florida East Coast Railway and the Obama Cuba Policy

The new U.S. policy that may open up trade opportunities with Cuba would make FEC a very attractive stock, because the 351-mile railroad that starts in Jacksonville is the only rail line that connects to the port of Miami. Actually, it makes FEC attractive as a buyout candidate even if it doesn’t go public.
Back when Florida East Coast Industries Inc. was a public company, its stock was always sensitive to hints that trade may be opening up with Cuba. Of course, that never panned out.
Port of Miami
Port of Miami
One investment manager who constantly talked up FEC was Thomas Herzfeld of Miami Beach, who runs a mutual fund called the Herzfeld Caribbean Basin Fund.
The Herzfeld fund invests in companies with economic ties throughout the Caribbean, but its particular focus is Cuba. The fund’s ticker symbol is “CUBA.”
Herzfeld began buying shares of FEC in the early 1990s and its investment in the railroad company represented about 20 percent of the fund’s assets before FEC was bought out by Fortress.
The Herzfeld fund was invested in one other Jacksonville-based company, Trailer Bridge Inc., before the marine freight company filed for a Chapter 11 bankruptcy reorganization in 2011. Trailer Bridge was also looking to provide freight service to Cuba if trade ever opened up.
Shares of the Herzfeld fund jumped as much as 47 percent Wednesday after President Barack Obama announced his new Cuba policy.
Herzfeld probably still has FEC on his mind because one of the fund’s current holdings is Norfolk Southern Corp., one of two major railroads that connect to FEC in Jacksonville. It does not own shares of the other railroad, Jacksonville-based CSX Corp.
The fund also owns shares of Fort Lauderdale-based Seacor Holdings Inc., which acquired 47 percent of Trailer Bridge in the bankruptcy reorganization.
The only other company in Herzfeld’s current portfolio with ties to Jacksonville is Vulcan Materials Co. Trade with Cuba could include building materials produced in Florida by Vulcan.
Herzfeld’s largest current holding, in terms of market value, is Panama-based Copa Holdings, which owns airlines that provide flights to Cuba and other Caribbean destinations.
However, if you want to speculate on what Jacksonville-based company could generate the most interest as Cuba opens up, FEC is a likely candidate.
Fortress, like other private equity firms, usually buys out publicly traded companies with the intention of cashing out by taking them public again a few years later or finding a private buyer for the business.
Fortress did that with another Jacksonville-based railroad operator, RailAmerica Inc.
Fortress acquired RailAmerica in 2007 and then took the short-line railroad operator public again in 2009. Fortress retained 60 percent of RailAmerica’s stock after the IPO but three years later, the entire company was sold to Genesee and Wyoming Inc.
Fortress will almost certainly at some point seek to cash out its investment in the historic Florida East Coast Railway, which was built by Henry Flagler more than a century ago. The opening of Cuba could be the catalyst to a deal.

 

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