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AAI to sell rail car division

THE BALTIMORE SUN

AAI Corp. in Cockeysville, once one of Maryland's fastest-growing defense companies, announced yesterday that it reached an agreement to sell a transportation division, a move that could clear the way for sale of the entire company.

No sale price was disclosed in the definitive agreement between United Industrial Corp., AAI's New York-based parent, and RailWorks Corp., a transportation service company with headquarters in Mount Washington.

Under terms of the agreement, RailWorks will lease two buildings at AAI's 60-acre campus off York Road where workers construct rail car components, and do overhaul work for Maryland's Mass Transit Administration and transit systems in other parts of the country.

Richard R. Erkeneff, president and chief executive of United and AAI, said the more than 200 workers in the transportation unit will become employees of RailWorks after the sale is completed next month.

Erkeneff said RailWorks could hire an additional 100 workers within a year of the takeover and as rail car production builds up.

Carla Berkenkemper, a spokeswoman for RailWorks, declined to comment on the company's plans for the AAI unit. She said the company would release no details until the sale is completed.

She said RailWorks has 36 operating subsidiaries in the United States and Canada, with about 2,500 workers.

Erkeneff said that once the transportation sale is completed, United will be a defense contractor, with the exception of its Detroit Stoker Co. unit in Monroe, Mich., which produces parts for industrial furnaces.

John J. Garrity, an analyst with Investec Ernst & Co., in New York, said he thinks the sale of AAI's transportation business is designed to increase the company's attractiveness to potential buyers within the defense industry.

"I think AAI will be gobbled up by another defense contractor in a new round of defense industry consolidation," Garrity said.

Garrity said he believes that Group Steel Partner II LP, a New York-based investment company headed by Warren Lichenstein that already owns a stake in United, is the force behind the sale of AAI's transportation unit.

With both major presidential candidates indicating that they will increase defense spending, Garrity said, "Defense stocks are on the rise again. There will be more consolidation in defense. That is why Warren Lichenstein is there."

Erkeneff did not discount the possibility of another company buying AAI. He said that after divestiture of its transportation unit, "AAI could go on a buying binge or be put up for sale.

"The board has not made any decisions, but it is working hard to identify potential acquisitions. It is easier," he added, "to sell the company without the transportation division than with it."

Garrity said AAI attracted a lot of attention in the defense industry in December when it won a big Army contract to build small, pilotless, reconnaissance planes and support equipment. The small planes are used to carry television cameras over a battlefield to identify targets and assess damage.

"That was an excellent win for us," Erkeneff said yesterday. Like most defense contracts, the original award was small, at $42 million. But it stands to become much greater. "This could be a 15-year program totaling $600 million," Erkeneff said.

Erkeneff said AAI's defense business "runs about $185 million a year." With the divestiture of transportation and some niche acquisition in defense, he said, that business could post annual sales gains of 10 percent or more.

Sale of the transportation unit would basically wipe out AAI's major diversification program in the early 1990s that was intended to limit its dependence on Pentagon contracts.

Erkeneff said the company sold its firefighter training business last month to IFTE PLC in London for $13.4 million.

It had previously sold a division that produced equipment used at commercial airports to supply weather information to pilots during landings and takeoffs. It has also spun off a small plastics company.

AAI, which accounts for about 85 percent of United's business, was one of Maryland's fastest-growing companies during the Reagan administration's defense buildup. From 1979 to 1987, its work force expanded from 1,500 to 3,500.

But it suffered greatly from Pentagon budget cuts, and employment dropped to 800, where it has remained in recent years.

RailWorks will rename AAI's transportation unit as RailWorks Transit Vehicle Group Inc.

"With a common customer base and common success factors, TVG represents an exciting and logical extension of RailWorks' strategy into the rail vehicle market assembly, rehabilitation and repair market," John G. Larkin, chairman and chief executive of RailWorks, said in a statement.

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