UPDATE 4-Genesee & Wyoming to buy RailAmerica for $1.4 billion

Mon Jul 23, 2012 1:45pm EDT

* 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 (Reuters) - 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.

REGULATORY APPROVALS

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 said.

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 Group.

Carlyle will get Genesee board seats, depending on the size of the investment, Hellmann said on the call.

FORTRESS EXITS

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 parties.

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 Monday.

BofA Merrill Lynch served as financial adviser to Genesee, while RailAmerica was advised by Deutsche Bank Securities.

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