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How Will Newly Acquired Genesee And Wyoming Pay For Its Infrastructure?

How Will Newly Acquired Genesee And Wyoming Pay For Its Infrastructure?

The pending acquisition of short line operator Genesee & Wyoming (NYSE: GWR) by Brookfield Infrastructure (NYSE: BIP) and GIC might not affect customers in the short-term, but in the longer-term, rail industry observers are waiting to see how and whether GWR will be able to make the capital investments needed to maintain its infrastructure.

Some of GWR's equipment and network is aging and may be in need of repair. Tracks may also need to be replaced and bridges might need rehabilitation. All of these needs will require capital investment, sources said. If GWR reaches a point where it needs to cut costs operationally or to fund capital projects, will the new owners push GWR to raise prices, sources wondered.

"We will have to see whether the new owners will allow GWR to make capital expenditures at the pace required to maintain the properties and add capacity as needed, and/or if they will put some of the railroads up for sale," a transportation consultant said. "I doubt if the transaction will benefit customers. Hopefully, it won't hurt."

Another initial reaction was a question about whether GWR's operating philosophy will change in part because international buyers are part of the deal. Associated with that question is whether existing management will remain at GWR, a rail expert said.

As precision scheduled railroading takes hold at almost all of the Class I railroads and those railroads seek to streamline operations and shed assets, they may seek to shed intermodal lanes or opt for more transloading. That could also affect GWR's future rail operations and sales and marketing efforts, the rail expert said.

In the meantime, the investment community didn't see any major hurdles preventing the acquisition from occurring. 

"As this is a financial transaction and not a rail-to-rail merger in the U.S., we see very little regulatory risk from the Surface Transportation Board approval process," Susquehanna Financial Group analyst Bascome Majors said in a July 1 research note. His firm expects the transaction to close in late 2019 or early 2020 as planned.

Brookfield and GWR could also see upside as the global economy improves, Cowen analyst Jason Seidl said.

"As the North American economy continues to grow, Europe recovers and the company's presence in Australia grows, GWR is well positioned to post strong top- and bottom-line growth. The company's operations overseas provide international diversification and various long-term opportunities," Seidl said in a July 1 note.

Meanwhile, Brookfield Infrastructure said yesterday that the acquisition of GWR will complement Brookfield Infrastructure's existing global portfolio.

"This is a rare opportunity to acquire a large-scale transport infrastructure business in North America," said Sam Pollock, chief executive officer of Brookfield Infrastructure. "GWR will be a significant addition to our global rail platform and will expand our presence in this sector to four continents." 

Pollock continued, "Brookfield Infrastructure is well-suited to work with the company to continue to improve the business, given our significant experience owning and operating rail, ports and other large-scale transportation infrastructure businesses." 

GWR currently owns or leases 120 short-line railroads in North America, Europe and Australia. It provides service on more than 26,000 kilometers of track with approximately 8,000 employees.

Brookfield Infrastructure is part of Brookfield Asset Management, a global alternative asset manager with more than $365 billion in assets under management.

GIC is a global investment firm with the primary strategy of investing directly into operating assets with a high degree of cash flow visibility and provide an inflation hedge.

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