Money-Losing Florida Railroad Set to Be 2019’s Biggest IPO So Far
Jonathan Levin, Bloomberg
A money-losing Florida railroad running behind schedule on its own projections is asking investors to value it at $3.15 billion in what’s set to be 2019’s biggest initial public offering so far.
Virgin Trains USA Inc., which shuttles passengers between Miami and West Palm Beach and struck a licensing deal last year with billionaire Richard Branson, is seeking as much as $538 million in an IPO set to price Tuesday. The company plans to use the proceeds to extend its high-speed luxury passenger service to Orlando, home of Disney World. It’s also planning to begin service connecting Southern California to Las Vegas. Those expansions could help increase annual ridership 37-fold to 20.8 million passengers within five years, the company said in its IPO filing.
Miami-based Virgin Trains has had to push back its timetable, though. Last year, the company, owned by Fortress Investment Group private equity funds, had to delay startup dates along the Florida corridor and thus missed its passenger forecast by about half, losing $87.1 million on $5.2 million in revenue in the first nine months.
The IPO will test a market for new listings that’s already been hamstrung by jittery investors worried about an ongoing trade war with China and the specter of the U.S. government shutting down again if President Donald Trump and Congress fail to reach a new spending agreement by Friday’s deadline.
Indeed, the five U.S. IPOs that priced in January raised a combined $353 million, the worst month since January 2016.
Virgin Trains will have skepticism to overcome.
Josef Schuster, founder of Chicago-based Ipox Schuster LLC, said he thinks the targeted valuation for Virgin Trains, based on selling 17 percent of the company’s shares at $17 to $19 each, is just too high for such a speculative investment.
“It’s a great concept, but I think it’s going to be difficult for shareholders at the outset to make money on this deal,” said Schuster, whose firm oversees about $1.7 billion invested in recent IPOs.
Ben Porritt, a Virgin Trains spokesman, declined to comment on the company’s listing, citing the quiet period before the offering.
The company’s IPO was expected to price below the marketed price range, a person familiar with the matter said Monday.
Potential New Markets
Virgin Trains — known as Brightline before its branding deal with Branson in November — sees shuttling Disney-bound tourists as more lucrative than its current route. It will eventually make three times more revenue from the Orlando run as from short hops between Miami, Fort Lauderdale and West Palm Beach, according to forecasts in a study by the firm Louis Berger, which was commissioned by the railroad.
Overall, Virgin Trains projects its Florida travelers will pay average fairs of $73 apiece by 2023 or early 2024, all the while consuming food and merchandise along with paid advertising.
Virgin Trains has secured all major permits, real estate and track rights for the Orlando expansion and construction is underway, with completion expected in three years. Yet it needs another $1.9 billion on top of the IPO proceeds and is discussing as much as $2.3 billion in debt financing for 2019, according to regulatory filings.
Tampa, Las Vegas
Extending service from Orlando to Tampa, Florida, and connecting Las Vegas to Victorville, California, will cost $5.3 billion more. Virgin Trains announced in September that it had agreed to buy DesertXpress Enterprises LLC for $120 million, giving it rights to develop the Las Vegas-Southern California corridor. It also acquired 38 acres for a station and mixed-use development next to the Las Vegas Strip for $150 million.
Train travel elicits a certain nostalgia in Florida even though residents rarely use it. In the 1890s, Standard Oil founder Henry Flagler, whose surname bedecks road signs, schools and subdivisions, built a railroad that transformed the peninsula, much of which had been thought to be unfit for human settlement. Virgin Trains is now trying to revive that route.
In the long run, the company could take its 125-mile-an-hour top speed trains to other U.S. markets that meet its basic criteria: essentially, key population centers separated by about 200 miles to 300 miles. The U.S. has five of the world’s 10 worst cities for traffic, including Los Angeles at No. 1 and Miami at No. 10, according to the transportation analytics company Inrix.
After the IPO and a related private placement, an entity associated with Branson’s Virgin Group will own less than 2 percent of Virgin Trains, according to regulatory filings. Fortress funds will retain about 82 percent through their AAF Holdings entity.
To succeed, Virgin Trains must convince more Americans to get out of their vehicles, especially in a car-culture state such as Florida. By 2023, the Louis Berger report projects the company will have a 9.9 percent slice of all trips between Orlando and Southeast Florida, with auto travel keeping the lion’s share of the rest.
That forecast presumes passengers would rather spend an estimated three hours 15 minutes on a train with wireless internet access and refreshments than four hours in a car. The National Railroad Passenger Corp., better known as Amtrak, already offers two daily trips between Orlando and Southeast Florida. Virgin Trains said it would differentiate itself by offering more departures and cutting Orlando-Miami travel times by more than two hours.
Passengers on Monday at the impeccable Miami station — still outfitted with the old Brightline logo — included commuters, students and out-of-town travelers.
Zachary Potter, a 43-year-old family lawyer based in Palm Beach, said the train had already allowed him to take more cases in Miami. He’s able to get work done all the way down and back while avoiding highway delays.
“It’s clean. It’s on time. It’s not crowded — and you avoid all the Miami traffic,” he said on his way to the train. “It’s wonderful.”
Virgin Trains needs to deliver on its target operating profit margin of 70 percent — before depreciation and amortization — which would be better than all four other passenger rail systems cited in the IPO document. The projection, based on another independent review by Louis Berger, evaluated revenue and costs from labor, fuel and other overhead. Virgin Trains is unique in that it owns its rail corridor and infrastructure.
For Schuster, the IPO investor, that all sounds enticing, but at what price? For all its glimmering new stations and on-board amenities, Virgin Trains is still selling train travel and not an internet service with exponential growth opportunities around the world, he said.
“The banks have to make this more interesting, because it’s the start of the IPO season,” Schuster said. “They don’t want to have the first deal kind of flop out of the gate.”
— With assistance by Drew Singer