Description

Laidlaw Int’l.

This is an opportunity to buy a stock that is fairly liquid, cheap, and not a lot of downside risk in my opinion.

Price: $25.25
Shares: 101 million
Mkt Cap $2,550 million
Net Debt $125 million (est for 8/31/05 FYE)
TEV $2,675

05E EBITDA (8/05): $417 mm, 6.4x EV/EBITDA
06E EBITDA (8/06): $448 mm, 6.0x EV/EBITDA

06E FCF (8/06): $448 EBITDA - $20 Pro Forma Interest - $200 CAPX = $228 million, or 9% FCF yield

NO CASH TAXES UNTIL 2009 AT THE EARLIEST due to NOL’s.



The company consists of three divisions as follows:


1) Education Services or School bus transport – (50% of ‘04 revenues, 75% of ’04 EBITDA) transports students to and from school based on the negotiated terms of contracts with school districts with the revenue mix as follows:
a. Home-to-school: 88%
b. Extra-curricular 5%
c. Charter & transit 4%
d. Other 3%

2) Greyhound Bus Lines – (41% of ’04 revs, 23% of ’04 EBITDA) bus transportation to cities and towns in urban rand rural areas throughout the US and Canada with following rev mix:
a. Passenger service: 76%
b. Package express 9%
c. Tour & Charter 7%
d. Food service & other 8%

3) Public transit services –(9% of ’04 revs, 2% of ’04 EBITDA)
a. Paratransit 67% (transportation for mobility challenged)
b. Fixed-route 29% (public municipal transit bus systems)
c. Other 5%

90% of education services is generated from contracts, generally with terms of 3-5 years and options for extensions. This business does 19% EBITDA margins ($1.5b revs, $287mm 04 EBITDA). Management has publicly stated goals of improving margins 300-400bps over the next 3-4 years.

Greyhound is currently rationalizing its route network and eliminating between 25-35% of all route miles which will cause revenues to decline 15-20%. Management is aiming for at least the same dollar level of EBITDA ($87mmm in ’04). Management is focused on improving yield and has abandoned the “anyone, anywhere” old Greyhound philosophy.

The thesis is you are buying a business at 6.0x EBITDA with 80% of the EBITDA being the school bus biz and the remainder Greyhound (save for the tiny public transport biz). I would consider this a business that should trade closer to a 6% - 6.5% FCF yield, which gets you to $34-$37/ share or 35-47% upside. I believe the market is not appropriately valuing the businesses nor the NOL.

The biggest misperceptions are that a) this company is primarily Greyhound however it will represent approx 20-25% of ’05 EBITDA, b) Greyhound is a horrible business – not true in my opinion as I’ve seen a lot worse businesses than Greyhound with 7%+ EBITDA margins (and going higher), and c) one has missed the move in the stock – there is a lot of room left here at these current multiples.

The balance sheet has recently been refinanced. $391mm of $404 mm Laidlaw 10.75% bonds have been retired, as well as the Greyhound Lines $150mm 11.5% ’07 Notes and $5mm 8.5% converts due ’07. The pro forma debt will be a $300mm term loan and the odd lot of $13mm Laidlaw bonds.

MANAGEMENT IS SHAREHOLDER FRIENDLY as evidenced by the historical steps the company has taken:
1. divested non-core healthcare divisions on 2/05
2. repurchased 3.8 mm shares from co. pension for $85 mm in 2/05
3. refinanced capital structure on 6/05
4. initiated common dividend of $.60 / share / per annum on 7/05

Investor relations does a good job in explaining the story, they know how to manage the street, and management has delivered what they have said. A very conservative analysis gets you $448 mm of FYE 8/06 EBITDA. The bridge analysis is as follows:

9 month YTD EBITDA is $376mm (as per 7/7/05 earnings release), add back $5.8mm on loss on sale of non-core tour bus operation in Canada gets you $382 million. Last year fourth quarter they did $41 mm, I’m forecasting $35mm (down slightly b/c school bus had some snow days in winter of 2003/2004 that lengthened the school year in June 2004 when those days are made up and correspondingly revenues are recognized, spending on cost cutting initiatives at school bus not incurred in LY’s quarter, and higher fuel expenses). So that is $417mm EBITDA for 8/05. Management is guiding $405 - $420mm (but not adding back the $5.8mm loss on sale, or $411 - $426mm after addback).

In school bus, we are assuming 100bps of margin improvement per year on $1.5 billion revenue base gets you $15 mm, Greyhound has operating leases rolling off approximating $16mm. Add those two to $417 mm of 8/05 EBITDA and it conservatively gets you $448mm for FYE 8/06 EBITDA. Any improvement at Greyhound and further margin improvement at school bus is further upside.

This company is under-levered. We are forecasting approximately $150mm net debt when they report their fourth quarter. On 8/05E EBITDA of $417mm, there are SEVERELY under-levered at .4x net debt/ EBITDA. A more appropriate capital structure would be closer to 2.5x – 3.5x net debt / EBITDA. I believe management will be more aggressive in addressing the capital structure in early calendar 2006 when the final portion (Northeast) of the Greyhound network is rationalized. Using the aforementioned target leverage multiples leaves management with $900 mm to $1.3 billion to potentially pay a special dividend, or $9 - $13/ share.

Catalysts:
Turnaround at Greyhound is more evident
Leveraged recap of under - levered balance sheet
Takeout by strategic or private equity buyer
Reduction of net debt via free cash flow

Catalyst