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Meridian Rail was a company providing services such as wheel maintenance, railcar repair and component reconditioning to Class I railroads and other railcar owners.
Pre-close, significant diligence issues required more than financial analysis, so Olympus immediately began building relationships with management and customers to better understand these issues. For instance, although one customer accounted for more than 50% of Meridian’s business, we determined this customer was equally dependent on Meridian as a primary supplier. After engaging the customer, we felt confident the relationship was healthy and would provide long-term stability.
Further, we determined fluctuations in the price of scrap steel affected Meridian’s revenues and expenses independently, making the net impact difficult to quantify. As a result, we conducted extensive research on future scrap steel prices and worked with management to develop a complex model that quantified the impact – thereby normalizing Meridian’s operating results and allowing us to bid based on these normalized earnings.
What drove such exhaustive analysis? Early in our diligence process, we recognized several attractive long-term growth drivers. Growing intermodal and western coal shipments, increasing competitiveness of rail vs. trucking, and increasing requirements for safety specifications mandated significant growth in rail maintenance spending. Consequently, Meridian was well positioned to benefit from these trends.
Meridian continued to strengthen its relationships with key customers and expand its business, nearly doubling the company’s EBITDA run rate during Olympus’ ownership. Olympus sold the company to The Greenbrier Companies (NYSE: GBX) in 2006, tripling the initial investment over a two-year period.