Florida Real Estate Developer Sold

One day after announcing it had $2.84 billion in commitments for a newly launched private equity fund, Fortress Investment Group LLC struck a deal to acquire Florida East Coast Industries Inc.

The Jacksonville-based real estate developer will be sold an all-cash transaction valued at $3.5 billion.

Funds managed by Fortress will pay about $84 per share for Florida East Coast Industries, broken out into a dividend of $21.50 and $62.50 per share. The total price represents a 13.3 percent premium to the stock’s closing price on Monday.

The deal also includes the assumption of debt.

Fortress, a hedge fund manager and private equity investor that recently went public, said the new fund will invest in asset-based businesses and asset portfolios, primarily in North America and Western Europe.

Florida East Coast Industries owns and operates Flagler Development Group, a Flagler County developer and one of the premier developers in the state with a portfolio of properties totaling about 8.8 million square feet.

The firm’s holdings are primarily concentrated in the large Florida cities of Jacksonville, Fort Lauderdale, Orlando and Miami.

Flagler also provides construction, consulting, Florida mortgage brokerage and property management services.

The company currently has about 1.8 million square feet under construction and also owns about 853 acres of entitled land in Florida, which could accommodate about 16.1 million square feet of development.

In addition, Flagler has more than 3,000 acres of Florida real estate in its land bank that is not yet entitled.

The buyout, which is scheduled to close in the third quarter of 2007, comes at an opportune time for Florida East Coast Industries, which suffered a drop in earnings by about 50 percent in the first quarter of the year.

Net income plummeted by 50 percent to $9.04 million from $18.7 million for the first three months of 2006. Revenue during the quarter dropped to $108 million from $136 million.

The company attributed the decline in revenue to a $43.9 million decrease in land sales and a $7.3 million dip in railway revenue.

Morgan Stanley served as financial advisor to Florida East Coast Industries on the sale and Greenberg Traurig, P.A., acted as legal advisor. Skadden, Arps, Slate, Meagher & Flom LLP served as legal advisor to Fortress.

Florida East Coast Industries traces its roots to the railroad from Jacksonville to Miami that was originally built by Henry Flagler in the late 19th century.

In the mid-1980s, it added a commercial real estate subsidiary now known as Flagler Development Group to tap the value of its extensive land holdings accumulated by the railroad operation.

FECI’s CEO told local media outlets that he does not expect changes at either the railroad or the real estate company because of the buyout, other than the transfer from public to private ownership.

Fortress is an international firm with $35.1 billion in assets under management. The firm went public in February and is traded on the New York Stock Exchange under the ticker symbol “FIG.”

For Florida East Coast Industries, the buyout marks a return of sorts to public ownership. The firm was acquired out of bankruptcy in 1961 by The St. Joe Co., another Jacksonville-based public company.

St. Joe, the North Florida real estate mainstay, held the firm until spinning off its stake in 2000 by distributing Florida East Coast shares to St. Joe stockholders, making Florida East Coast an independent public company.

In this climate of lagging home sales and Florida home mortgage loan demand, it’s interesting to find a merger of this magnitude.