Foster is worth about 13 excluding DM&E. The company is growing, but needs to start generating free cash, pay off debt, and buy back stock. DM&E is worth about 400 millon right now, might be worth up to 1.2 billion if expansion goes through. If the deal does not go through, Foster should monetize the holding by possibly selling its stake to DM&E. It could then pay off all debt and buy in about 10% of its float. Either way, there is little downside risk from here. A buyout of Foster or DM&E is always possible. Enjoy,
I think you're in the right ball park but believe your valuation analysis is conservative. When PRB is financed, for example, the obvious strategic investors will step up - namely NS, CP & CN as the most likely candidates. The railroads will pay more for DM&E than a stand-alone market valuation due to the synergies of captive plants along the acquiring railroads respective networks. Look at a Class I rail map to determine how interesting DM&E looks to the above and overlay that on the plants that those railroads serve. You can easily see how one of the big railroads above would like to ultimately own DM&E. This being the case, your $1.2B figure is conservative. It's more like $2-3 BN now and significantly more the closer DM&E is to first shipments of PRB coal - an acquisition 3-years from now will be accretive to the acquirer and the analysts will start to discount those earnings in the acquiring company's pro-forma financials. In all cases, if your $13 per share for the existing business is correct, and you add another $10-15 per FSTR share based on the value of its holding in DM&E - a relatively conservative acquisition scenario would imply significantly more than the $16.50 we see today.
FSTR shares are a veritable bargain at $16.50 per share. The shorts will get squeezed in no time.
But Kurt....Have these other railroads figured out what it will truly cost to build adn operate a heavy haul railroad over the slippery, slumping Pierre shale terrain of western South Dakota? It may be possible to build the railroad on the shale deposits, but how can it be held together over time? Have you ever walked over the shale terrain after rain? The weathered stuff turns to axil grease and you typically end up on your keester. DM&E and the STB have purposefully pooh-poohed the Pierre shale problem in order for Schieffer to transform the sow's ear into a silk purse. For an example of the hubris of construction engineers working for DM&E, see the following; you wouldn't expect anything else from people who wanted to preserve their jobs (and golden parachutes): http://www.findarticles.com/p/articles/mi_m0BFW/is_5_95/ai_55462128
If you do an analysis of the synergies to one buyer in particular, CN - you will find that they are the most logical buyer, and likely the one that will pay the largest premium. A competitive auction process with multiple bidders, including energy companies may produce a value to FSTR shareholders in the high teens to low 20s per share. This is where it gets interesting. Look for possible M&A activity to pick up within the first year or two of construction.