In a move with some implications for coal producers and consumers, Genesee & Wyoming (NYSE: GWR) and RailAmerica (NYSE: RA) said July 23 that they have entered into an agreement under which Genesee & Wyoming will acquire RailAmerica for an all cash purchase price of $27.50 per share.
Genesee & Wyoming’s (GWI) acquisition of RailAmerica will combine the two largest short line and regional rail operators in North America, strengthening GWI’s ability to serve its industrial customers and Class I railroad partners. In addition, the combination should yield significant synergies and provide strong leverage to the eventual recovery of the U.S. economy, while creating a platform for future industrial development along railroads in the 37 U.S. states in which GWI will do business.
The acquisition is subject to U.S. Surface Transportation Board formal approval of GWI’s control of the RailAmerica railroads. GWI expects to close the transaction into a voting trust as early as the third quarter while it awaits formal STB approval of GWI’s application to control RailAmerica’s railroads. Upon formal STB approval, GWI would be able to fully integrate RailAmerica. STB formal approval may be as early as the fourth quarter but could be delayed until the third quarter of 2013, the railroads noted.
Using the previously reported results of GWI and RailAmerica, the transaction increases GWI’s total revenues by nearly two-thirds to approximately $1.4bn (PF2011) and doubles North American revenue to approximately $1.1bn (PF2011). Following the transaction, GWI will have 111 railroads (108 in North America), 15,100 miles of track (12,900 in North America), 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’s footprint of railroads will grow from 24 U.S. states to 37 U.S. states, while the U.S. overall will represent about 70% of GWI’s pro forma revenue, with Australia at 20%, Canada at 10% and Europe at less than 1%. Following the transaction, GWI expects to originate or terminate more than 4% of carload traffic in the U.S., with volumes well balanced across all of the Class I carriers.
Jack Hellmann, President and CEO of GWI, said: “The acquisition of RailAmerica by GWI is 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.”
John Giles, President and CEO of RailAmerica, said: “This is an exciting day for both RailAmerica and Genesee & Wyoming. For RailAmerica, the sale represents validation of the transformational improvements that our management team and employees have made since the acquisition of the business in 2007 by investment funds managed by affiliates of Fortress Investment Group LLC. From this strong base of operations and having unlocked significant shareholder value, a combination with Genesee & Wyoming is the logical next step in creating a combined organization that will be a powerful driver of North American rail traffic for decades to come.”
Both companies have dozens of short-line subsidiaries
GWI owns and operates short line and regional freight railroads and provides railcar switching services in the U.S, Australia, Canada, the Netherlands and Belgium. In addition, it operates the Tarcoola to Darwin rail line, which links the Port of Darwin with the Australian interstate rail network in South Australia. Operations currently include 66 railroads organized in 10 regions, with more than 7,600 miles of owned and leased track and approximately 1,400 additional miles under track access arrangements. It provides rail service at 17 ports in North America and Europe and perform contract coal loading and railcar switching for industrial customers.
In its Feb. 29 Form 10-K annual report, GWI said that its coal and coke commodity freight revenues accounted for 9%, 12% and 13% of its total revenues in calendar 2011, 2010 and 2009, respectively. The coal and coke commodity group consists primarily of shipments of coal to power plants and industrial customers. An example subsidiary is the Utah Railway, which handles coal movements in Utah.
RailAmerica’s Feb. 23 Form 10-K described how short line railroads fit into a U.S. picture dominated by the Class I railroads like CSX, Norfolk Southern, Union Pacific and BNSF: “Use of regional and short line railroads is largely driven by interchange traffic between carriers. In many cases, a short line will originate the freight transport and hand off to a Class I railroad, which will transport the freight the majority of the distance, usually hundreds or thousands of miles. The Class I railroad will then drop the freight off with a short line, which provides the final step of service directly to the customer. Most short line railroads depend on Class I traffic for a substantial portion of their revenue. Our portfolio of 43 railroads is a mix of regional and short line railroads.”
That description also gets to the heart of why the GWI/RailAmerica merger is probably not the formation of a new Class I railroad. Both companies have relatively short line segments that, except in maybe a few isolated cases, can’t be merged together into longer line segments to form the basis of what is considered a Class I railroad.
For calendar 2011, coal accounted for 18% of RailAmerica’s carloads.