The buyout of Central Freight (CENF) by Phoenix Coyotes owner Jerry Moyes is overshadowed by a lawsuit brought by Jerry’s brother Ronald and his children against him.
Jerry Moyes, ex-CEO of Swift Transportation, bought Central Freight from Viking Freight Lines in 1997 and subsequently took CENF public in 2003. And only three years later, he is taking the company private again.
In the IPO, Moyes and his family sold 4 million shares for $15 to the public, netting $61 million. He is now repurchasing these shares for $2.25/share at a cost of approximately $24 million. In the meantime, he has received over $20 million in lease payments from CENF for several freight terminals he owns. Therefore, his cost of buying back the company is only slightly higher than his income from the terminal leases while the company was public.
CENF leases 36 terminals from Moyes and companies controlled by him, and more than half of CENF’s revenue passes through these terminals. A few months before the IPO, CENF re-priced these leases and increased the annual lease payments to Moyes from $4.4 million to $7.2 million “to reflect fair market value”. Isn’t the whole point of signing fixed-rate term leases to have a fixed rate and remain independent of fluctuations in market values?
In 2005, Moyes settled an SEC investigation related to his holdings in Swift Transportation by paying $1.26 million, and stepped down as CEO of Central. But this did not diminish his influence on the fate of the company.
Moyes continues to control CENF indirectly through his holdings of 40% of CENF. In February 2005, the board considered a PIPE transaction in order to raise funds; later that year, the board discussed a going-private transaction with the same financial firm, but because the financial firm was seeking Moyes’ support in such a going-private transaction, no deal could be reached. Moyes apparently was unwilling to cede control. Therefore, his ownership constituted a de-facto poison pill that prevented the board from entering into any other transaction than selling to Moyes.
Central’s financial performance has been dismal. It’s operating ratio, a cost measure, stands above 100%, meaning it costs Central more to bring in revenue than the amount of that revenue. Management has a turnaround plan that is supposed to bring the ratio down for 2006, and return CENF to profitability in 2007. Would bankruptcy have been a real risk? Probably not, because then Moyes would have lost his $7.2 million income from the terminal leases. LTL terminals are not exactly liquid investments for which buyers can be found easily – you don’t hear people brag at cocktail parties about their trucking terminal investments.
To make things worse, Morgan Keegan’s fairness opinion about the buyout is flawed. Most of their valuations calculated by different methodologies exceed the $2.25 offered by a wide margin. However, they dismiss all of these calculations “due to the potentially speculative nature of management’s projections” and “due to Central’s historical and projected unprofitable financial results.” Why do investment bankers accuse management of optimism only in buyouts, but rarely ever in IPOs?
Despite the settlement of Ronald’s lawsuit, Jerry Moyes’ troubles are far from over. In a separate action, Jerry’s children have filed a lawsuit seeking the return of $110 million that Jerry allegedly borrowed from a trust set up for their benefit. Add to that the $240 million that Moyes is said to have sunk in the Coyotes, and with all these expenses maybe Jerry Moyes needs to squeeze every penny he can get out of CENF shareholders.
Disclosure: The author manages the Pennsylvania Avenue Event-Driven Fund (PAEDX), which holds shares of Central Freight.