Study: Infra investors eye rail deals(3)

More infrastructure funds are expressing interest in the sector, accounting for 15% of all transportation deal activity in 2008 versus just 6% in 2007, according to an industry report by BMO Capital Markets.

Amid a difficult year for deal-making in the transportation sector overall, global infrastructure funds are increasingly viewing railroad assets as an attractive investment destination, a new report on the transportation industry concludes.

The authors, Canadian investment bank BMO Capital Markets, found that mergers and acquisitions in the global transportation sector were down only 2 percent in 2008 versus the year before, with 142 announced transactions across logistics, trucking, railroad and marine sub-sectors.

Of those deals, 21 were in the railroad sector, representing almost 15 percent of transportation M&A activity in 2008, compared to only 6 percent in 2007.

BMO said part of the increase resulted from the fact that global infrastructure investors, such as The Carlyle Group’s $1.15 billion infrastructure fund, “appear to be targeting railroads as a segment of the transportation economy with attractive assets”.

Deals such as Carlyle’s purchase of a majority interest in intermodal railroad facilities operator ITS Technologies & Logistics accounted for 10 percent of BMO’s deal count in the sector.

Chicago-based BMO managing director Ed McGuire said the evidence for infrastructure funds’ interest in the sector is more anecdotal.

BMO has been party to several conversations with both large rail carriers, known as class 1 railroads, and small ones, known as class 3 railroads, about selling some of their assets while retaining their management and use. Such arrangements, commonly referred to as sale-leasebacks, “have been talked about with many funds,” McGuire said.

“My view is that it won’t be for all the railroads, but there will be select assets for which that might work,” McGuire added. As an example, he said, class 3 rail carriers serving consistent markets, such as agriculture, with no competing interstate highway transport routes, might be good candidates for infrastructure funds seeking steady investment performance.

Still, investors may not rush into the rail sector just yet. McGuire said a lot of the deals announced in 2008 represented the “tail end of the rush of activity” initiated in 2006 and 2007 – a spillover that is unlikely to happen this year. BMO counted 88 transportation deals in the first half of 2008, versus only 34 in the first half of this year.

“That’s not surprising in light of what was going on,” McGuire said. Like many sectors of the economy, transportation experienced a pull-back in activity after the bankruptcy of investment bank Lehman Brothers in September 2008.

Looking forward to 2010, though, BMO economists see increased activity for all modes of transport and rail in particular.

“Rail was the last to go into the recession and, because of its fuel efficiency, [will be] the first to come out,” McGuire said.