7/23/2012 - 2:52:33 PM
Genessee & Wyo/RailAmerica deal may be derailed
By MJ Clark
Yesterday Genesee & Wyoming Inc., a short line and regional freight railroad company that also handles contract coal loading for the mines in the Powder River Basin, announced this morning that it will acquire RailAmerica Inc. for an all-cash purchase price of $27.50 per share, or $1.39 billion. The deal, which relies on a combination of bank lending and private equity funds, will more than triple GWI's debt. GWI is counting on the rebounding U.S. economy and the merged group's cash flow to allow it to quickly pay down the debt.
The GWI deal combines the two largest short-line and regional railroad operators in North America, with the combined company operating a total of 108 railroads over 12,900 track miles in North America and 111 railroads worldwide; 1.8 million carloads (1.6 million in North America); 1,000 locomotives (900 in North America); and 4,300 employees (3,900 in North America). GWI is an experienced acquirer of short-line railroads, having integrated 65 railroads through 36 acquisitions since 1985.
Partly as a result of the falling demand for coal and its byproduct coke, GWI saw traffic decrease 6.9 percent for the second quarter. The transaction significantly increases GWI's customer and commodity diversification. When considered as a combined company, in 2011, no single commodity group would have represented more than 16 percent of pro forma freight revenues and no single customer would have represented more than 3 percent of pro forma revenues. On a geographic basis, GWI's footprint of railroads will grow from 24 to 37 U.S. states, while the nation will represent approximately 70 percent of GWI's pro forma revenue, with Australia at 20 percent, Canada at 10 percent and Europe at less than 1 percent. Following the transaction, GWI expects to originate or terminate more than 4 percent of carload traffic in the United States, with volumes well balanced across all of the Class I carriers.
The acquisition is subject to the United States Surface Transportation Board (STB) formal approval of GWI's control of RailAmerica's railroads. GWI expects to close the transaction into a voting trust as early as the third quarter of 2012, while it awaits STB approval.
However, this morning Kendall Law Group announced that it was investigating RailAmerica Inc. on behalf of shareholders to determine whether RailAmerica and its board breached their fiduciary duties by entering into the agreement without properly shopping for a deal that would provide the best value for shareholders. In their release, Kendall Law Group noted that the price per share offered by GWI represented an 11 percent premium to RailAmerica's Friday closing price.
In GWI's release on Friday, GWI pegged the premium over Friday's closing price at 10.6 percent, and noted that the price was a premium of 27.6 percent over the closing stock price as of May 21, 2012, the last trading day prior to the date on which RailAmerica announced that it was exploring strategic alternatives.
As the day went on, more law firms joined in. Former United States Securities and Exchange Commission attorney Willie Briscoe and the securities litigation firm of Powers Taylor, LLP added their voices to the controversy, citing a Yahoo! Finance analyst's claim that the true inherent value of RailAmerica may be as high as $28 per share. Boston firm Block & Leviton noted that since January 2012, RailAmerica's stock price has been rising steadily, up approximately 40 percent for the year alone. Moreover, the company was poised to continue this success.
The last large railroad transaction was Warren Buffet's purchase of the BNSF Railway Co. in 2010 for $25.6 billion. Buffet said at the time that the purchase was a bet on the economy's long-term recovery.