The Railroad Week in Review:
RailAmerica completed its $325 million acquisition of RailTex on 2/4. RTEX now becomes a wholly owned operating subsidiary of RailAmerica. This makes RAIL the world's largest shortline operator by dint of owning or having equity interests in 50 railroads operating over 12,500 miles of rail lines in four countries on three continents. In North America alone RAIL has created nine major operating regions to offer rail service to more than 1,100 rail customers. Approximately 2,700 people are employed worldwide in the expanded system, which includes 515 locomotives and more than 8,200 freight cars.
RTEX is expected to contribute approximately 40% of revenues and operating income. Due to the restructuring of the debt of both companies, there is no way to calculate the percent of net income that RTEX as a stand-alone entity will contribute. However, it is anticipated that RTEX will contribute approximately 38% of EBITDA.
RailTex shareholders will receive $13.50 in cash and two-thirds of a share of RailAmerica stock in exchange for each share of RailTex stock. The Company stated that it will issue approximately 6.6 mm shares for the acquisition. As previously reported here the acquisition should result in at least $10 mm in annual synergies and substantial operating efficiencies.
For the quarter ending 9/30/99 RAIL's debt exceeded its market capitalization. At RTEX debt was on that date 80% of market cap. Combining the companies with a blended target value of $20 a share yields a market cap something on the order of $436 mm based on the pro forma 22 mm shares mentioned earlier. Pro forma debt of the new RAIL will be roughly $476mm, 109% of market cap.
Recently Moody's, in its first RAIL evaluation, assigned a Ba3 rating (having "speculative elements") to $375 mm of senior secured bank facilities. Said the rating agency, "The ratings reflect RAIL's modest pro forma revenue base, its high leverage, and thin interest coverage resulting from the largely debt-financed RailTex acquisition." Moody's elaborated further citing some questions as to how well the RTEX acquisition will actually go. The relatively short time RAIL has been in business outside North America was another factor.
In previous reports we've pondered the revenue effects at certain class1s seeking to grow at GDP+ and other benchmarks. Numbers like 3.5% were bandied about. Now comes Vanguard's John Neff on the Barron's Round Table (Jan 17,2000) to say, "Economic growth probably will drift down to 2.5% this year but if you look at potential excesses -- inventories, capital expenditures, consumer expenditures -- they all seem to be pretty good." A few paragraphs later Goldman Sach's Abby Joseph Cohen weighs in with, "3.5%-4% growth is the most likely range." Seems like the high value growth strategy still applies. (UP's Jack Koraleski looks for a 3.5% growth rate this year.)
Later in the same article the thread turns to stock prices and evaluation measures. Talking about how at one time Coke and Gillette sold at three times their growth rates and the then-immature tech stock lagged that multiple considerably. Now the tables are turning. Cisco expects to grow at 30% in 2000 and sells for $120, four times its growth rate, while Gillette looks for a 15% growth in 2000 and sells for $30, twice its growth rate.
What conclusions can one reach about a GNWR, looking at 30% growth in 2000 and selling at less than half that -- $12 a ticket? Or Union Pacific, growing earnings at 20% and selling for $44? The pundits are saying the tech bubble can't go on forever and they are looking for safe havens like Martin Marietta (aggregates) and SPS Technologies (specialty manufacturing). Small caps, too, are coming back into vogue. So if we can get some liquidity in our small railroad equities, do you think we might see some action?
Two rail properties of the privately held Washington Group of regional railroads -- Montana Rail Link (MRL) and I&M Rail Link (IMRL) -- have launched a new highway-rail safety program that will help the railroads remotely monitor active highway-rail grade crossing signals and reduce potential field problems over 2,200 miles of track.
The program calls for the installation of an innovative rail crossing monitoring system that utilizes wireless communication from more than 500 crossing signals in six states to the railroads. The system features prompt crossing alarm and equipment status information, including the early warning of potential equipment malfunctions.
Sixty units have been installed; approximately 25 to 30 units are expected to be installed annually on each line. MRL and IMRL are replacing current equipment that records events at highway-rail crossings and transmits the information over phone wires, costing the railroad approximately $50 per month per crossing.
Burlington Northern Santa Fe has begun a $14 mm and bridge maintenance project on its main line between Fresno and Stockton, Calif. To minimize the impact on customers and communities, the work will be completed in a two-week period rather than spread across many months. BNSF will bring in 500 additional employees from various parts of the railroad that will be assigned to specific track, rail and bridge renewal projects across the line. This is a process BNSF has used to good effect on other corridors in the past so we would expect the same kind of excellent results here.
On Friday BNSF said it had achieved 94.3% on-time performance, dock to dock across its 33,500-route-mile railroad network for the month of January 2000, an all-time record for the company. The comparable on-time figure for January 1999 was 85.1%. January 2000 system-wide on-time performance was better than the full-year 1999 level of 91%, which was up substantially from 82% system-wide on-time performance for full-year 1998. Recall that the FY 1999 operating ratio was a respectable 75.4, largely driven by adopting scheduled operations wherein they run the same trains the same way every day.
For 2000 BNSF is shooting for even higher for system-wide on-time performance, while continuing to focus on meeting all customers' commitments. I think they can do it as evidenced by their on-time performance by commodity group: Coal, 100%; Intermodal/automotive, 93.8%; Agricultural products, 91.4%; Merchandise, 89.1%. This last will make connecting shortline operations much more efficient. Among the traded shortlines and regionals GNWR, RAIL, RTEX, and WCLX will all benefit.
Finally, Canadian National and BNSF have filed a petition with the STB, which proposes a 365-day schedule for the agency's review of their proposed business combination. The filing date has been set at March 20 or shortly thereafter. The proposed schedule -- substantially longer than the schedules adopted for most recent STB control proceedings -- anticipates a full discussion of all issues relevant to the CN/BNSF transaction, including its cumulative and any potential "crossover" effects on the North American rail industry.
Wisconsin Central in 4Q98 earned $18.3 mm including net equity income from overseas affiliates, up from $17.4 mm on revenues of $86.3 mm a year ago. North American operations, principally the Wisconsin Central Railroad and affiliates, brought in revenues of $91.4 mm, up 6% YTY and reflecting increases in almost every commodity group. The down side was that operating expenses for the quarter rose 8% as a result of higher labor and fuel costs incurred partially from slowdowns in east-looking connections. Without a special personnel charge ops expense was up 6.5%.
Offshore net equity income from affiliates was $5.7 million, a 30% YTY increase. EWS was $3.7 mm, up 23.3%, and TranzRail was up 72.7% to $1.9 mm on 5% more quarterly revenues which set a new quarterly record, thanks to improving New Zealand and Asian economies. For FY 1999 net earnings fell 12.3% to $66.9 mm. Said WC, nonrecurring items in both years affect comparability. North America's 1999 results were negatively impacted by a 3Q99 pretax personnel reorganization charge of $3.9 mm. Results for 1998 were positively impacted by pretax income of $5.4 mm related to the sale of rights under a transportation agreement. Without the 1999 charge and the 1998 credit, the 1999 net would have been up 2% to $6.7 mm.
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