RailAmerica, the conglomeration of 45 short line
and regional railroads, is for sale. Fortress Investment Group, which took RA
private in 2007, has employed Deutsche Bank to find a buyer for its majority
(56 percent) interest in the company, several sources are telling me.
RA’s properties total 7,500 miles of track in 28 states and
include such names as the Arizona & California, Kiamichi, Kyle, and Toledo,
Peoria & Western railroads. Fortress took the company public several years
ago, retaining a majority interest. With the stock trading for more than $23
share and flirting with its all-time high, Fortress presumably feels now would be
a good time to make an exit.
Among the interested buyers, one source says, could be
Berkshire Hathaway, owner of BNSF Railway. You could call RailAmerica the
Little Santa Fe Railway group. Sorry, but the company is not for sale
piecemeal, I am told. If it is your genes to be a railroad mogul, it is all or
nothing, in other words.—Fred W. Frailey
45 railroads is a bit more than I would want to tackle on my first try. Besides, I don't think my checkbook is that robust. Thanks for the tip, though.
Does anyone have any thoughts on what they may be thinking with respect to the FEC?
Would Bershire Hathaway be able to navigate the regulatory approval process? By some measures, it already is the largest railroad owner in the United States. It did not need STB approval to acquire BNSF because that was its first railroad and there was no effect on the regulatory process.
I have followed Rail America since its inception and consulted with more than one investment company asking my opinion of RA. From startup RA overpaid for many lines and bought some lines with very limited futures, and carried a lot of debt. They have been working hard to clean up the railroads and their balance sheet over the past decade. A few properties got lucky with shale oil, frac sand, etc. My opinion is Fortress has done what it can and wants to sell high. When Fortress bought FEC, they found a far superior property and realized the RA package was marginal. You will note Fortress has kept FEC separate from RA in its corporate structure. There are a few decent properties there, but you get a lot of chaff with the wheat. I can't imagine Berkshire Hathaway would have any interest - they want companies dominant in their field. I don't see any fit unless Matt Rose wants to pick off a line or two and has a buyer for the rest.
How to interpret this? That RA management has succeeded and the proof is that the stock price is high, or that they basically brought nothing to the game except Wall Street cleverness (and available cash when the seller was ready to sell) and now wish to shuck off these properties to a willing buyer. My opinion: Nothing about these guys impresses me--a bunch of recycled Class I mediocrities living the easy life in Florida. Some of their individual short line managements, like those who put New England Central back in operation not too long ago, are more impressive.
It will be interesting to see who might buy RailAmerica. I some how doubt that Berkshire Hathaway would be interested.
As an armchair railroad tycoon, I can think of a rail line or two I would like to own if I had the funds, however, a collection of 45 scattered lines does not sound like a dream.
Maybe Marino will step up with his Patriot proceeds........ :-)
A way to get some capital for the FEC project??
Private equity firms purchase properties with the hopes of selling within a few years. Load up the balance sheet with debt, payout "special dividends" to the PE group, thus recovering a considerable amount of the initial investment then run the property for a few years, sell out, take the cash and reinvest.
There is nothing wrong with this. A business, or in this case, a portfolio of railroad properties must survive. Several years ago Bear Stearns (before the fall) had a 300 page report on the possibilities of taking railroads private...didnt think it would occur, but it sure did with BNSF/BRK.
The CF&E is in pretty decent shape these days, thanks to an infusion of cash from NS for trackage rights between Ft Wayne and Hobart, In. Not sure if there are many other such situations out there.
MP173 (Ed): Congratulations. Instead of spending all your time watching trains and salivating, you obviously spent some of it on usefully educating yourself on the traits of private equity and hedge funds. Your comments are dead right on. In the case of CP, Pershing Square has made no noises - yet - about leveraging the railroad to the hilt. Ackman seems to be willing to make his money out of CP being properly managed and more profitable than it has been for a couple of decades.
A Berkshire Hathaway acquistition could raise some significant regulatory issues. The effect of such a trainsaction would be to place BNSF and the RailAmerica properties under common control. As such, it would be treated the same as a merger between BNSF and the RailAmerica properties, some of which are competitive with BNSF. At the very least, it would be a big regulatory proceeding. I imagine that some other Class I's that have sold or leased lines to RailAmerica companies would not take kindly to such a transaction, particularly where their relationship with these short lines is competitive with BNSF.
Warren Buffett has a practice of thinking big when his Berkshire Hathaway is on the prowl for acquisitions, which it almost always is. Falcon48 is quite right about the regulatory issues. They are not insurmountable, but they would be very costly, probably sufficiently costly to *** any deal. BNSF competitors would oppose and the cost of taking them out of a merger cost would diminish the value of RA. Would a Berkshire-RA combination be treated as a merger of a Class II or Class III (remember, CN refused to proceed with the WC acquisition some years ago until STB agreed to treat it as a minor transaction. That saved CN tremendous regulatory cost.
Don't know all the where-alls and what-fors but, unless all their properties had more than one big railroad connection I would not think there would be great interest in the whole lot. Shortlines obligated to give one big railroad all their enterchange subject the shippers to high rates set by the big boys (SL&RG as an example). Having competitive rates with at least 2 roads is really the best way for a shortline to be very profitable, busy, and growing.
Not sure if RailAmerica would be a fit for BRK. It is one thing owning BNSF, quite another with a collection of shortline/regionals. I looked at the map of RA and there isnt much synergy with BNSF. In fact most of the class 1's have gotten away from these lines...on purpose. However, RA is probably non union on most, if not all of their lines.
I havent looked at the financials for RA...not sure if the numbers are available since they are PE. BRK requires a pretty high return on equity plus a wide moat. Not sure if either is available with RA.