U.S. Railroad Merger All About Size

Railroad operator Genesee & Wyoming Inc. (NYSE: GWR) announced this morning that it would acquire RailAmerica Inc. (NYSE: RA) for $27.50 per share in an all-cash deal worth about $1.39 billion. Genesee & Wyoming (GWI) will refinance existing debt and add about $2 billion in new debt to finance the deal. The company has received a commitment of $2.3 billion in debt financing from BofA/ML, a division of Bank of America Corp. (NYSE: BAC), and $800 million in equity financing from the Carlyle Group (NASDAQ: CG).

Both GWI and RailAmerica own about 7,500 miles of track, mostly in the United States, although GWI also has operations in Australia and Europe. RailAmerica owns track in the U.S. and Canada. According to the announcement:

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). … On a geographic basis, GWI’s footprint of railroads will grow from 24 U.S. states to 37 U.S. states, while the U.S. overall will represent approximately 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.

While relatively small compared with Berkshire Hathaway Inc.’s (NYSE: BRK-A) (NYSE: BRK-B) 2010 $26.5 billion acquisition of the Burlington Northern Sante Fe Railway, GWI’s buy basically doubles its size and increases its footprint for a reasonable price. And size still matters in railroad operations, especially in the U.S., where declining shipments of coal are putting pressure on rail operators to increase traffic and carloads for other cargoes.

GWI shares are inactive in premarket trading this morning, but shares of RailAmerica are up nearly 6% at $26.25, in a 52-week range of $11.06 to $26.90.

Paul Ausick