Genesee & Wyoming Inc. agreed to purchase RailAmerica Inc., the carrier controlled by Fortress Investment Group LLC, for $1.39 billion to combine North America’s two largest short-line and regional rail operators.
Genesee, which will pay $27.50 a share cash for RailAmerica, plans to fund the deal and refinance existing debt with about $2 billion in new debt and $800 million of equity or equity-linked securities. It has $2.3 billion in committed debt financing from Bank of America Corp. and $800 million of committed equity financing from the Carlyle Group.
The purchase price is almost 11 percent more than the July 20 closing price and almost 28 percent higher than the stock price on May 21, the last trading day before RailAmerica said it was exploring a possible sale, Genesee said.
“It certainly is a bigger transaction than we’ve seen Genesee engage in, but they were able to get attractive financing and they were able to refinance some of their existing debt,” Allison Landry, a New York-based analyst at Credit Suisse, said in a telephone interview. “I don’t see this as them over-levering to do this transaction.”
The soonest the deal would close is in the fourth quarter of 2012, subject to approval by the U.S. Surface Transportation Board, Genesee executives said on a conference call today.
“We’ve considered doing something like this for a long time,” Chief Executive Officer Jack Hellmann said on the call. RailAmerica “has been transformed over the past five, six years. We are much more comfortable with it.”
After the purchase, Genesee will have 111 railroads, 108 of them in North America, and 4,300 employees.
Including net debt, Genesee is paying about 10.5 times earnings before interest, taxes, depreciation, and amortization, according to data compiled by Bloomberg. The median buyers paid in a survey of 10 similar deals over the past decade was about 9 times ebitda.
The largest rail takeover over in that period was Warren Buffett’s acquisition of Burlington Northern Santa Fe Corp. for about $26 billion in 2010, Bloomberg data show.
RailAmerica climbed 9.9 percent to $27.27 at 1:01 p.m. in New York, the biggest intraday increase since May 22. Genesee gained 0.1 percent to $56.06. The acquirer’s shares previously fell 7.6 percent this year.
RailAmerica was taken private in February 2007 by Fortress, which paid $658 million, excluding net debt. The New York-based investment firm, which hired new management while initiating cost cuts at RailAmerica, then took the company public again in October 2009. Fortress held a 60 percent stake in RailAmerica as of March 31, data compiled by Bloomberg show.
The U.S. rail industry’s deregulation in the 1980s buoyed short lines as major carriers such as Union Pacific Corp. opted to let smaller companies handle traffic on less-traveled routes.
RailAmerica is working to reduce its ratio of expenses to sales, a benchmark for railroads, to as low as 77 percent this year, versus the 89 percent operating ratio it had in 2006 before Fortress took it private.
The measure was about 78 percent last year, data compiled by Bloomberg show. That compares with an average operating ratio for companies in the Bloomberg Industries North American Rail Freight Transportation Index of about 73 percent, the data show.
Bank of America provided financial advice to Genesee, while Simpson Thacher & Bartlett LLP, Steptoe & Johnson LLP and Thorpe Reed & Armstrong LLP acted as legal advisers.
Deutsche Bank AG worked as Rail America’s financial adviser and prepared a fairness opinion for its shareholders. Skadden Arps Slate Meagher & Flom LLP and Sidley & Austin provided legal counsel.