According to several sources, Deutsche Bank Securities has opened the first round of bids to buy RailAmerica, the short line conglomerate that runs 45 railroads totaling about 7,500 miles of track in 28 states and three Canadian provinces, along with a railroad construction and maintenance firm. A second round of bidding has an August 1 deadline. Then Deutsche Bank will try to hammer out a deal with the most attractive bidder.
Who, you must be wondering, might that most attractive bidder be? I am going to make three guesses. First, Genesee & Wyoming, a rival short line operator whose management is widely admired. It’s hard to imagine an auction of RailAmerica that would not draw Genesee’s active interest.
Second, Watco Companies, the Pittsburg, Kan.-based owner of 26 short line railroads. Why Watco? Kinder Morgan Energy Partners has an investment in Watco and could be a source of capital. I also wouldn’t be surprised if Watco (or G&W) is partnering with one or more other rail companies. At least one Class I railroad would like to reclaim several branch lines sold in the past to RailAmerica. In other words, there is a possibility that RailAmerica will be bought and broken up by Watco or any other buyer.
Third, an infrastructure company, most likely Australia’s Macquarie Atlas. Macquarie and Spain formed a partnership to lease both the Indiana Toll Road and the Chicago Skyway. Macquarie and maybe Cintra as well are said to be looking for a railroad investment.
RailAmerica, a majority of whose stock is owned by Fortress Investment Group, has traded in the $23-25 a share range since the announcement in late May that it was considering the company’s sale. Fortress is rumored to want $30 a share from a buyer, but people I’ve talked to don’t think that’s in the cards. The likely number I’m hearing is $26-27. In 2009, Fortress sold a minority stake in the firm in an initial public offering for $15 a share. — Fred W. Frailey
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