* Deal will create biggest U.S. regional railroad operator
* Genesee to pay $27.50 cash per share
* Deal will more than triple Genesee's debt
* Genesee hoping to benefit from a U.S. economic recovery
By A. Ananthalakshmi and Greg Roumeliotis
July 23 Genesee & Wyoming Inc struck a
deal to buy rival RailAmerica Inc for $1.39 billion in
cash to create the biggest short-line railroad operator in the
United States, hoping to benefit from an economic recovery.
The deal, which relies on bank lending as well as private
equity money, will stretch the balance sheet of Genesee, which
will more than triple its debt in the hope that the merged
group's cash flow will allow it to quickly deleverage.
The U.S. rail infrastructure sector has not seen major deal
activity since Warren Buffett's $26.5 billion acquisition of
Burlington Northern Santa Fe Railway in 2010. That deal was seen
as a bet on the long-term strength of the U.S. economy.
Combined, Genesee and RailAmerica will originate or
terminate more than 4 percent of all carload traffic in the
United States, Genesee said. They will have 111 railroads and
15,100 miles of track, and annual revenue of over $1.4 billion.
"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," Genesee
CEO Jack Hellmann said in a statement.
Genesee offered $27.50 per share for RailAmerica, a premium
of about 11 percent to the stock's Friday close. The stock had
already risen two-thirds this year in anticipation of a bid. The
shares were up 10 percent at $27.28 in Monday afternoon trade.
Genesee shares were little changed at $56.02. They are down
almost 8 percent this year.
The closing of the deal, subject to approval from the U.S.
Surface Transportation Board, could be delayed into next year.
Depending on whether the deal is deemed minor or
significant, STB approval could come as early as the fourth
quarter of 2012 or be delayed until the third quarter of 2013,
CEO Hellmann said on a conference call.
Under a worst-case scenario, Genesee may have to divest some
assets to gain regulatory approval, Hellmann said, but added
that the probability of that was low.
The company said it expects to hold the RailAmerica assets
in a trust from the third quarter, while it awaits approval.
"We expect the STB to approve the transaction because
short-line rail traffic is competitive with other modes (such as
trucking), by and large; therefore, there should be no
anti-competition issues," Stifel Nicolaus analyst John Larkin
If the deal is approved by the end of the year, it will
increase Genesee's earnings per share by more than 10 percent in
2013, the company said.
RailAmerica has agreed a 30-day period in which it can exit
the merger agreement for a termination fee of $49 million,
should it receive a better offer from another party. If Genesee
fails to execute the deal for certain reasons, it will have to
pay RailAmerica $135 million.
Genesee said it has received $2.3 billion of committed debt
financing from Bank of America Merrill Lynch, part of which will
refinance its debt of about $655 million, and up to $800 million
of committed equity financing from private equity firm Carlyle
Carlyle will get Genesee board seats, depending on the size
of the investment, Hellmann said on the call.
RailAmerica is 60 percent-owned by Fortress Investment Group
. Fortress bought RailAmerica in 2007 for $1.1 billion,
including debt, and took it public in 2009. The deal with
Genesee values RailAmerica at about $2 billion including debt.
Fortress made over two times its initial investment with the
Genesee deal and the 2009 IPO, two sources familiar with the
matter told Reuters. Fortress declined to comment.
RailAmerica said in May it was considering a potential sale
of the company and had begun preliminary talks with third
Besides Genesee, Watco Companies LLC, several infrastructure
funds and some Canadian pension funds were evaluating bids for
RailAmerica, Reuters reported earlier this month.
Ontario Teachers' Pension Plan submitted a bid for
RailAmerica as well, a person familiar with the matter said on
BofA Merrill Lynch served as financial adviser to Genesee,
while RailAmerica was advised by Deutsche Bank Securities.