The Fortress Post Mortem

On Feb 14, 2007 Fortress completed its acquisition of RailAmerica; the short-term build-up in price was immediately lost after the news of acquisition. Many analysts that covered the railroad industry resounded that the buyout was a bad deal for Fortress because of RailAmerica’s sloppy record, but Fortress most likely discovered some undervalued assets in the company for it to offer a 49% premium to RailAmerica shareholders.

Subsequently, Fortress recovered from the post-acquisition dip and reached a record high of $31.34 on Feb 26, 2007 with almost 3 million shares changing hands on that day. On March 13th, amid concerns about subprime loans, Fortress shares plunged to an all-time post-IPO low of $25.25. One primary reason for this downfall was significant investment Newcastle Inc., a Fortress subsidiary, had made in several blocks of subprime mortgages in the past few months. However, the housing market concerns were short-lived as the sector contained the potential subprime liabilities; FIG subsequently climbed back to $28.53.On March 20th, Fortress announced a partial dividend of12 cents per share (equivalent of an annual dividend of 85 cents per share). This is an increase of over 25% over the previous year’s 68 cents/share dividend payout; the company also restated its desire to continue issuing dividends on a quarterly basis up to 75% of its net income. In after hours trading, the stock gained $1.38 in after hours trading to open at $28.20.

On March 21st, analysts of five underwriters of the Fortress IPO – Goldman Sach, Lehman Brothers, Bank of America, Deutsche Bank, and Citigroup, all expressed positive outlook for Fortress. Citing the increased dominance of hedge funds and private equity and their expectation to outperform both the markets as well as traditional instruments, every analyst except Prashanth Bhatia of Citigroup gave it a Buy or above rating. Marc Irizarry of Goldman Sachs attached a “Buy” rating with a $32.47 price target, while Lehman Brothers’ Roger Freeman gave it a “Overweight” rating with a $32 target. Citigroup’s Bhatia justified a “Hold” recommendation by citing that while the company could generate solid returns over different economic cycles, the growth prospects are already built into the price.

On April 17th, Fortress filed its 10-k for 2006; the company’s earnings rose almost 170% to $442.9 million from $192.7 million in 2005. Revenue from investment activities jumped 46% to $1.52 billion. While the results were for the period before the company went public, share of Fortress rose 40cents in mid-day trading to close at $31.30. Fortress attributed the recent growth to the strong economy and improving markets in Europe, where it has been on an acquisition spree. The company’s securitization products, which pool loans from various sources have also performed well in the last one year. Assets under management rose almost 17% in the fourth quarter; as a consequence, more than a third of the 2006 income came from the fourth quarter. Its $10.5 billion henge fund contributed a whopping 64% of the company’s $1.5 billion revenue. The earnings and revenue growth triggered a surge, sending FIG up to a record high of $34.03.

On April 20th 2007, Fortress offered a 5.9% premium to Interpool shareholders in order to acquire the container rental company’s assets. On May 8th, Fortress announced plans to buyout Florida East Coast Industries, a supplier of transportation containers in a $2.4 billion deal.

“fortress shares fall a third from debut high”

“Analysts start coverage of Fortress”

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