GWI: Rebel Shareholder Urges “No Sale” Vote

With Shareholder Vote on Brookfield Acquisition Only Days Away, Financial Analyst/GWI Shareholder Victoria Dalrymple Fires Second Broadside at Brookfield Acquisition. Open Letter to GWI Board and Shareholders Argues that $112 per Share Sale Price is Substantially Undervalued.

Editor’s Note: The following article is drawn from public resources that were made available in their complete and final form to ANRP, and which we are dutifully reporting. ANRP takes no position on the proposed Brookfield/GWI transaction, and only seeks a fully transparent process that will be of benefit to the railroad industry, the GWI lines, and the customers and communities they serve.

30 September, Darien CT – On Thursday 03.Oct GWI shareholders will vote to accept or reject Brookfield Infrastructure Partners’ $112 per share offer to take the railroad private. What could go wrong at this point? Well …

Introduction of the nine-page 30.Sept Open Letter to GWI Board Members and Shareholders:

“What Is a Railroad Worth? GWR Value Is $145-$165 per Share

“The consideration offered by Brookfield Infrastructure Partners (BIP) and GIC for Genesee & Wyoming Inc. (GWR) is grossly inadequate. GWR Board is in clear breach of its fiduciary duties for failing to secure a process that will yield the company’s shareholders a fair consideration.

“Analysis points to value of $145-$165 per share and EV/EBITDA multiple in the 15X to 17X range compared to the current valuation of 13.6X or 13X for the core GWR US business and $112 per share.

“Brookfield’s own rail assets have significantly higher valuations and market multiples within its structure despite weaker asset and leverage characteristics. The stable and diversified cashflows of GWR’s unique business combined with limited debt within the context of infrastructure assets make infinite return arbitrage possible. Public and comparable transaction multiples support the inadequate price argument including minimal relative deal premium to GWR market price.

“Finally, management is personally benefiting disproportionately from the deal terms. At the same time, it has provided inadequate disclosures about GWR prospects and clients as well as conflicts of interest in selling parts of the business thus limiting the public shareholders’ consideration and ability to make an informed decision.”

Dalrymple presents five examples of her contention that the deal is a bad one ( italics indicate original author’s wording in the Open Letter ):

 

  1. Market valuation of Brookfield’s own tail assets1Is significantly higher , though Dalrymple asserts that their return potential is lower.
  2. Infinite internal rate of return (IRR) possible through debt capacity arbitrage
    “Debt/EBITDA of below 3x for the GWR core US business provides ample space for increasing leverage on the asset. GWR US can support interest only bullet loans (Arc’s debt structure) exceeding the $5.6B equity value necessary for its purchase.”
  3. Public companies’ trading comps and the lack of control premium
    “If the merger is not completed,… it is likely that the price of G&W’s common stock will decline significantly” warns the GWR DEF14A 08/20/2019 filing. However, given the minimal premium assigned by the current acquisition price, a decline is not warranted. Additionally, there was a higher bid of $115 per share disclosed in the 14DEF filing that was not given time to secure financing.
  4. Public and Transaction Comps
    Dalrymple asserts that the provided comparisons are an inadequate gauge.
  5. Clear Breach of Fiduciary Duties
    “The sale process was inherently flawed and did not result in a materially increased bid from the indications at the end of 2017 ($100 when the stock was trading at $80). “

Requests by ANRP for comments by GWR officers were not answered. A qualified subscriber expressed doubts about certain of Dalrymple’s assumptions, such as putting GWI’s operations on par with Class I railroads, when there exist critical differences. One example is that, “GWR’s core is volume-related — lacks pricing control of Class I’s.”

 


1. Brookfield owns the 5,100 kM Arc WA (Australia), and the VLI S.A., a Brazilian rail concession, port and logistics company operated by the Vale S.A. mining conglomerate. in Brazil {STB #47260}.