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So, while the short line/regional space has always been deal friendly, and covered well by commercial banks and leasing companies, it has attracted the new rock stars of Wall Street — the private-equity firms. Fortress Managing Director Joseph Adams will deliver a keynote (“RailAmerica — The Path Ahead”) at the ASLRRA event. So far, Fortress has brought in new management and attracted a stampede of interest from both the “buy” and “sell” sides. Rumors abound about “sale books” to show potential buyers.
For public companies, private-equity ownership allows for a capital injection and time to grow far from the quarter-to-quarter prying eyes of folks like, well, me. For private companies, stable cash flow, reasonable size and/or the ability to “cluster” carriers make for attractive targets.
Meanwhile, experienced and capable management companies are still looking to join or rejoin the short-line/regional party (e.g., Patriot Rail Corp.). There may be only one RailAmerica, but there are more than a few would-be Fortresses looking to invest.
There’s one place all of these folks might meet: South Dakota. Buying and selling is just one part of the money story; lending and borrowing is another. And the long Dakota, Minnesota & Eastern Railroad Corp. saga took another twist in February when the Federal Railroad Administration turned down DM&E’s $1.33 billion RRIF loan request.
Whether it was a straight FRA decision or one influenced by others (say, the Office of Management and Budget), I do not know. But I suspect that the DM&E has always had other options besides the feds — after all, the DM&E has built a fine franchise in of itself (think “ethanol”), and has gone through the rigorous permitting, regulatory, environmental and most of the political process on a winning streak.
So what’s next? A private-equity partner? Outright sale? Stay tuned.
What goes around ...
Speaking of money: March 14 was the annual “Railroad Day on The Hill,” when rail supporters from carriers to suppliers to customers descended on Washington, D.C., to lobby.
This year’s hot topics included the proposed 25 percent tax credit on rail capex (available to shippers, too) — a plan that could face an uphill struggle given rails’ recent financial results (and, in particular, their mega share-buyback programs).
The failure to enact the tax credit program would be a bad thing for the nation, but when have we counted on D.C. for long-term strategic thinking? Perhaps short lines and regionals will be more successful getting their own tax credit program extended beyond the end of ‘07.
So: While money may not make the world go ‘round, it does help it spin more efficiently. And supporting the rails, big and small, in their attempts to shoulder more of the transportation burden is, indeed, in the national interest.
Tony Hatch has been a senior transportation analyst on Wall Street for 19 years, and an independent analyst and consultant since 1998.