The two largest owners of shortline railroads in North America have agreed to combine.
Genesee & Wyoming Inc. said it will purchase RailAmerica for $27.50 per share, for a total of $1.4 billion, plus another $600 million G&W would assume as debt.
Jack Hellmann, president and chief executive officer of G&W, said the deal would be “a straightforward combination of two organizations with overlapping holding company structures and complementary railroad geographies. As a result, the synergies between the companies are expected to be significant, and we anticipate unlocking significant shareholder value.”
The combined companies will be “transformational for our North American operations,” he said, and will operate 108 railroads over more than 12,000 track miles. The company released this map
of their combined operations in the U.S. G&W also has railroads in Australia, the Netherlands and Belgium.
“From a commercial standpoint, we believe that this footprint not only provides us with strong leverage to any eventual recovery of the U.S. economy, but also creates a powerful platform for future industrial development along railroads in the 37 U.S. states in which we will do business,” said Hellmann.
G&W said the purchase will strengthen its “ability to serve its industrial customers and Class I railroad partners."
G&W said it expects to fund the transaction and the simultaneous refinancing of its existing debt with approximately $2.8 billion of new debt and equity or equity-linked securities. It has received $2.3 billion of committed debt financing from Bank of America Merrill Lynch and $800 million of committed equity financing from The Carlyle Group, of which it has agreed to take a minimum of $350 million through a private placement of two-year mandatorily convertible preferred stock from a Carlyle buyout fund.
The acquisition is subject to approval by the U.S. Surface Transportation Board, which it said could come by the end of the year, but could be delayed until the third quarter of next year. G&W expects to close the transaction into a voting trust as early as the third quarter of this year while it awaits formal STB approval.
"We expect the STB to approve the transaction because short line rail traffic is competitive with other modes (i.e., trucking), by and large," the investment firm Stifel & Nicolaus said in an investment note. "Therefore, there should be no anti-competition issues. In addition, GWR should be able to make a compelling argument that there are synergies related to the transaction which could, in theory, be shared with shippers."
It noted that G&W management "expects cost savings synergies to be at least $36 million, about three-quarters of which should be realized within one year. We expect synergies to come from reduced overhead, better purchasing, better relationships with Class I rail partners, and some consolidation of regional management."
Stifel and Nicolaus also said it believed the transaction price represents a full and fair valuation.
G&W said the deal will diversify its customer and commodity
“In 2011, on a combined basis, no single customer would have represented more than 3 percent of pro forma revenues, and no single commodity group would have represented more than 16 percent of pro forma freight revenues of the combined railroads."
On a geographic basis the railroad said its footprint of railroads will grow from 24 U.S. states to 37, while the United States overall will represent approximately 70 percent of its pro forma revenue, with Australia at 20 percent, Canada at 10 percent and Europe at less than one percent." - Chris Dupin