Rail America (RRA) Acquired by Private Investment Group

Trains Magazine General Discussion
1

Fortress Investment Group LLC to Acquire RailAmerica, Inc. for $16.35
Per Share in an All-Cash Transaction

BOCA RATON, Fla., Nov 15, 2006 (BUSINESS WIRE) – RailAmerica, Inc.
(“RailAmerica”) (NYSE:RRA) announced that it has entered into a
definitive merger agreement with an affiliate of Fortress Investment
Group LLC (“Fortress”) under which RailAmerica’s shareholders will
receive $16.35 in cash for each share of RailAmerica common stock
they hold, a 32% premium to the NYSE closing price of $12.38 on
November 14, 2006 and a 49% premium to the average closing price over
the last 60 trading days. The total value of the transaction,
including the refinancing of RailAmerica’s existing debt, is
approximately $1.1 billion.

“This transaction offers outstanding value to our shareholders. We
view the transaction with Fortress as the best alternative for
RailAmerica’s shareholders and are excited about partnering with
Fortress going forward,” said Charles Swinburn, Chief Executive
Officer of RailAmerica.

Wesley R. Edens, CEO of Fortress stated, “Fortress is excited to have
the opportunity to invest in the North American rail industry.
RailAmerica has assembled a well diversified portfolio of shortline
railroads throughout North America and we look forward to working
with the management team to grow the company.”

Morgan Stanley & Co. Incorporated acted as financial advisor to
RailAmerica in connection with the transaction. Houlihan Lokey Howard
& Zukin Financial Advisors, Inc. provided an opinion to the Board of
Directors of RailAmerica that the merger consideration is fair to
RailAmerica’s shareholders. Holland & Knight LLP acted as legal
advisor to RailAmerica and Skadden, Arps, Slate, Meagher & Flom LLP
acted as legal advisor to Fortress.

The merger agreement was unanimously approved by RailAmerica’s full
Board of Directors. The closing of

2

I was just getting ready to ask if anyone had heard about this.

3

ZINGGG! wonder what that might end up being?

Tremendous opportunity for the shareholders, I’ll say that much.

4

There is always stuff filed. I hope Joe got stock options.

ed

5

Reading I have done states that the group specializes in buying distressed companies.

Typically, those types start swinging an axe soon, to reduce the distress.

I wonder how that scenario plugs into the CF&E? Just wondering out loud, but that’s gotta be one of the bigger pieces of their puzzle. And it doesn’t look like there is a whole lot of traffic on it.

I wonder if the lease payments owed to CSX over their deal, are counted in the debts absorbed by the new owner.

Seems as though if it is, CF&E might be a candidate to spin off?

6

Anti:

I think CFE is pretty solid. It certainly would be interesting to get a look at their books…but that will never happen. I took a look at the RailAmerica website a while back and I think they are paying CSX $1million per year for the CFE, with perhaps a larger amount based on volume.

Their stock has really done nothing over the past five years, bouncing around the $10 level and got as low as $7 during the 02 recession. I wouldnt call them distress as they have positive cash flow.

Lots of private equity purchases going on these days. It is almost becoming like the 80’s all over again, only this time there is no bidding wars. Management cuts a deal with an equity firm, makes an offer, the management stays on board and uses the cash flow to pay down the debt. This time it is “all friendly”. Which makes you wonder…are the shareholders getting full economic value or not?

ed

7

I doubt that all management will stay in this one. I’d look for some significant cuts and a number of spinoffs. There are a number of lines in the RA portfolio that are in tough shape. I’d look for them to peel off the poor performers and keep the larger better performing properties.

LC

8

RailAmerica announces merger agreement RailAmerica, Inc. has entered into a definitive merger agreement with an affiliate of Fortress Investment Group LLC under which RailAmerica’s shareholders will receive $16.35 in cash for each share of RailAmerica common stock. The total value of the transaction, including refinancing of RailAmerica’s existing debt, is approximately $1.1 billion. As of 10:00 a.m. today, RailAmerica shares were trading at $15.73 on the New York Stock Exchange, a 27% increase over yesterday’s closing price of $12.38.

RailAmerica operates 42 short line and regional railroads totaling 7,800 miles in 26 states and three Canadian provinces. In this year’s first nine months, RailAmerica revenues increased 13% to $348.5 million from the corresponding period in 2005; operating income was $36.9 million, compared to last year’s $37.2 million, and the operating ratio rose to 89.4% from 88.0%. This year’s operating costs included expenses related to the company’s ongoing Process Improvement Project.

The merger agreement was unanimously approved by RailAmerica’s full board of directors. The transaction, which is expected to be completed during first-quarter 2007, is subject to regulatory approvals, approval of the holders of two-thirds of RailAmerica’s outstanding common stock, and other customary conditions. Debt financing has been fully committed by Citigroup Global Markets Inc. and Morgan Stanley Senior Funding, Inc., which acted as financial advisor to RailAmerica. Upon completion of the transaction, RailAmerica will become a privately held company, and its common stock will no longer be publicly traded.

Fortress Investment Group LLC describes itself as “a global alternative asset manager.” The company lists approximately $26 billion in assets as of Sept. 30, 2006. The firm was founded in 1998, is headquartered in New York, and has affiliates with offices in Dallas, San Diego, Toronto, London, Rome, Frankfurt, and Sydney.

Meanwhile, RailAmerica co-founder

9

I posted the above because I found it interesting that RA and Gary Marino’s new group Patriot Rail were mentioned in the same article. I was especially interested in the fact that Marino is backed by an unidentified private equity fund…

LC

10

I just hope service on the I&O gets better cause it SUCKS!!! A elevator I switch has been waiting for a grain train since monday and I&O cant tell us when it will get here, now mind you it is on their railroad they just dont have crews (so give me a pilot and let me get it).

11

I understand that most of the RA employees were informed yesterday of the buyout. Perhaps they are looking for work elsewhere and aren’t available to run trains…

LC

12

As mentioned earlier in another thread, RailAmerica routinely buys and sells various short line operations, so I don’t think that we’ll see a fire sale as a result of being taken private. One advantage of going private is that management no longer has to pay much attention to the whims of Wall Street and stagnant stock prices, although the new owners will definitely expect a decent return on their investment.

13

As far as abandonments go, do you think that the STB is likely to be more receptive, or less receptive to requests for abandonment from a short line than the are the class ones?

Not just to rattle the sabers of alarmism, but my opinion of these distress acquisitions is that the buyer usually feels compelled to “fix” things, in effort to set the ship on an even keel.

Shedding underperforming spurs, and the like, seems a logical step.

14

The Wheeling and Lake Erie has trackage rights on the CFW&E between Lima and Upper Sandusky. They could use the CFW&E to reach Chicago.

http://www.wlerwy.com/maps/wLEMAP.htm

http://www.railamerica.com/railmaps/CFER.htm

15

Don’t follow those things much anymore and I don’t know anything about the profit strategy of the outfit that is buying out RRA, but…

The size of the buyer indicates that they know how to get a decent buck on their investments. Sometimes, in deals like this, there are signs that the breakup value is worth more than the market value established by the stock exchange or the purchase price. That says that they might sell off some or maybe even all of the separate properties. It doesn’t necessarily mean that some of the rail lines will be abandoned, but one can’t say that abandonment and salvage is excluded from the mix.

16

I appreciate what you are saying, and agree. I was just wondering out loud about abandonments because it appears to me that in some instances, “shortlining” a rail segment may have been a path of least resistance pursued by class ones, rather than fight through a likely to be opposed outright abandonment. SO, just wondering if that was the case, and even the class II couldn’t make a go of a particular line… if they are going to be forced to operate it regardless?

That wouldn’t be the case where the shortline leases their track from an original owner, but in the instances where ownership has been passed, would it?

17

Yes, I guess they could. but if CF&E is limited to one chicago train daily (by their lease agreement) then CSX appears to have a (probably intentional) choke hold on possible growth.

It’s funny because I had no idea how the revenue split worked between the class ones and the shortlines, until I got to reading at the Rail America site.

Seeing now that a shipper is most likely to negotiate their total price through the class one, with the class one in effect subcontracting with the shortline, sure focuses the control in one hand.

So. it would appear that CSX would not take kindly to it’s “dependants” conspiring to route traffic away from #1. (in a hypothetical W&LE-CF&E joint venture)

Am I missing something?

18

Anti:

I am not exactly sure of how CFE gets their revenue. I have looked at their tariffs and it appears they have charges for each carload carried. The rates look pretty healthy…$900 or so per carload. I have heard they pay a considerable amount ($300 sticks in my mind) to the IHB for switching and making up the train at Blue Island.

Perhaps someone can discuss this concept of shortline revenue a bit. It would seem that there would be a good reason to have a thru rate from A to B, with the carriers dividing the revenue.

I think I will request a copy of the proxy which outlines the terms of sale.

Regarding private equity firms…they are on a huge buying spree right now. Today it was announced that Clear Channel ($19 billion) was purchased as was Readers Digest (2 billion). There is lots of money out there for private equity firms to borrow. They are actually leveraging these buyouts at about 9-10X EBITA. I guess it looks good on paper, but what about when the next recession hits?

Typically, private equity firms will look for companies that are in mature industries which generate a high level of free cash flow, that do not require capital expenditures. Rail America would fit that as there is very little investment to be made in the current operations.

The equity company will sell off the dogs and keep the rest.

ed

19

I talked with someone at RailAmerica this afternoon. He did return my call and said there will be more filings with the SEC.

I told him I was interested in the P/L and financials of the CFE and he asked if I wanted to purchase it. Not today, but I would like financials while it was still public.

He indicated the CFE is a “strategic line” and the new owners wanted to get their “feet wet” and get some experience in railroading. It will be interesting to see.

Check back on the RRA website and see if new filings are out from time to time.

ed

20

He asked you if you wanted to purchase the CF&E? [:O]