Genesee & Wyoming (GWR) to Acquire Glencore Rail in A$1.14B Deal

Genesee & Wyoming Inc. (G&W) (NYSE: GWR) announced today that its subsidiary Genesee & Wyoming Australia (GWA) has entered into agreements to acquire Glencore Rail (GRail) for A$1.14 billion (About $870 million) and concurrently issue a 49% equity stake in GWA to funds managed by Macquarie Infrastructure and Real Assets (MIRA).

Transaction Highlights

• Strengthens GWA’s nationwide footprint in Australia by adding a significant presence in the Hunter Valley coal supply chain in New South Wales complementing GWA’s existing intermodal, agricultural and mining business in South Australia and the Northern Territory
• Initial financial impact to G&W is expected to be neutral to G&W’s Net Income and EPS, and modestly free cash flow accretive. In the medium term, G&W expects significant Net Income, EPS and free cash flow accretion from anticipated growth under the rail haulage contract
• Acquisition of GRail for A$1.14 billion (US$866 million at current exchange rates) adds A$100 million of 2017E EBITDA (US$76 million), which is expected to grow to A$150 million (US$114 million) in the medium term supported by a long-term take-or-pay and exclusivity contract with Glencore Coal Pty Limited (GC)(1)
• Creation of GWA partnership (51% G&W and 49% MIRA) with an enterprise value of A$2 billion (Adjusted EBITDA of A$180 million from combined GRail and existing GWA run-rate) joins operating expertise of GWA with financial resources of MIRA, the largest manager of infrastructure assets globally(1)
• Transaction expected to close on December 1, 2016, subject to Australian Foreign Investment Review Board approval

G&W and MIRA Comments

Jack Hellmann, President and CEO of G&W, commented, “The acquisition of Glencore Rail solidifies GWA’s position as the most efficient rail operator with the highest service quality in the Australian rail market. Through the acquisition and 49% new equity issued to MIRA, we are effectively doubling the size of GWA and retaining 51% of a business with stronger long-term free cash flow and a significant portion of GWA’s rail shipments under long-term, take-or-pay contracts.”

“We are pleased to be enhancing our existing relationship with Glencore through a two-decade rail haulage contract that provides for exclusive rights to rail shipments from some of the premier steam coal mines in the world, serving end users in Japan, South Korea, Taiwan and Southeast Asia. Furthermore, we believe that our partnership with a world class Australian infrastructure investor in MIRA will enable us to leverage our rail platform for extensive future growth within Australia.”

Frank Kwok, Asia-Pacific Co-Head of MIRA, said, “We are pleased to be partnering with G&W, a leading global rail operator in their Australian business. GWA is a strong business that owns and operates essential rail infrastructure supporting industries primarily operating in regional Australia. For MIRA, this agreement expands our infrastructure footprint in Australia and allows us to contribute our international experience investing and managing transport and transport services assets.”

Description of Glencore Rail (GRail)

GRail’s coal haulage business was established in 2010 as an alternative rail service provider to the incumbent railroads in the Hunter Valley and has grown to be the third largest coal haulage business in Australia. G&W’s Freightliner Australia subsidiary (acquired by G&W in March 2015) has been the rail operator of GRail since inception and presently provides haulage and logistics services for approximately 40 million tonnes per year of steam coal that is among the lowest cost and highest quality coal in the world. These services will continue following the GRail transaction.

In conjunction with the acquisition of GRail, GWA will enter into a 20-year rail haulage contract with GC. The rail haulage contract will contain rights, subject to certain limitations, to exclusively haul all coal produced at GC’s existing mines in the Hunter Valley to the Port of Newcastle and will have minimum guaranteed volumes over the first 18 years. Initial volumes under the rail haulage contract are expected to be approximately 40 million tonnes per year. GC’s obligations under the contract will be guaranteed by Glencore plc (LN: GLEN).

The GRail transaction includes the acquisition of nine train sets (30 locomotives and 894 wagons). Rail haulage service is operated on government-owned, open-access track that is coordinated by a neutral third party. Track access fees will continue to be paid directly by GC.

In addition to being the most efficient operator in the Hunter Valley, GWA’s quarterly service performance under the existing contract with GRail has consistently exceeded 99% of GC’s ordered tonnes for export. Following the acquisition, GWA plans to deploy surplus high-horsepower locomotives from South Australia to New South Wales to pursue new business opportunities and provide additional redundancy for the existing coal haulage operations. In the medium term, GWA anticipates purchasing two additional train sets (approximately A$50 million per train set) to handle incremental tonnages that are expected to be available under the rail haulage contract with GC.

GWA Financial Overview

Since GWA presently operates the GRail business (since the 2015 acquisition of Freightliner), the revenues and operating costs associated with GRail have been included in GWA’s financial results; therefore, the table below highlights the anticipated incremental contribution from the GRail acquisition on G&W’s Australian Operations (GWA Combined).

(a) Approximate run-rate of existing GWA operations, adjusted to exclude the impairment and related costs recorded in the first quarter of 2016 and costs incurred to the transactions described herein(1)

(b) Year 1 expectations for GRail. Net Income for GRail includes the consolidated impact of the capitalization of GWA following the transaction and excludes MIRA’s 49% share of GWA’s Net Income

To create the A$2 billion enterprise value partnership, G&W and MIRA are contributing a combined A$1.3 billion in the form of cash, shareholder loans and contributed equity, and GWA is entering into a five-year A$690 million senior secured term loan facility that is non-recourse to G&W and MIRA. These proceeds will be used to acquire GRail for A$1.14 billion, repay GWA’s existing A$250 million term loan (under G&W’s credit facility) and pay A$32 million of transaction costs.

The new A$690 million senior secured term loan from the Australian bank facility is initially priced at BBSY +290 bps (BBSY is analogous to LIBOR). GWA anticipates it will enter into interest rate hedging contracts to fix 75% of interest payments for the first three years and 50% of interest payments over the remaining two years. All-in interest cost for the A$690 million senior secured term loan facility is approximately 5% per annum inclusive of the amortization of upfront fees. The new A$690 million bank facility is non-recourse to G&W.

In addition, GWA will incur approximately A$14 million of interest expense associated with a A$240 million non-recourse subordinated shareholder loan from MIRA used to fund a portion of its equity contribution (note G&W has a matching shareholder loan for a portion of its contributed equity that is eliminated in consolidation).

G&W will also contribute A$88 million (US$67 million) in cash that will be drawn under G&W’s revolving credit facility at a current borrowing cost of 2.5%.

Financial Impact on G&W

G&W expects the transaction to be initially EPS neutral, subject to finalization of acquisition accounting under U.S. GAAP, and for the transaction to be modestly free cash flow accretive. In the medium term, G&W expects significant EPS and free cash flow accretion from anticipated growth under the terms of the rail haulage contract.

Following the transaction, G&W will continue to consolidate 100% of GWA in its financial statements and will record a noncontrolling interest for MIRA’s 49% equity ownership. The incremental financial impact to G&W’s consolidated financial results is expected to include US$76 million (A$100 million) of revenue, US$44 million (A$58 million) of EBIT, US$32 million (A$42 million) of depreciation & amortization, US$30 million of interest expense (A$40 million), US$9 to US$10 million of net income attributable to noncontrolling interest for MIRA’s 49% stake (A$12 to A$13 million) and US$3.8 million (A$5 million) of capital expenditures.

The expected US$30 million (A$40 million) incremental interest expense includes the net impact of the new A$690 million term loan facility (~5% interest rate) compared to GWA’s existing interest expense (A$250 million at a ~4% interest rate), as well as the interest expense from the A$88 million (~2.5% interest rate) that G&W is contributing to the partnership and interest expense from the A$240 million shareholder loan (~6% interest rate) used to fund a portion of MIRA’s investment.

G&W has concurrently entered into an amendment to its Senior Secured Syndicated Facility Agreement (the “credit facility”) to, among other things, remove GWA as a borrower and guarantor under the credit facility upon the consummation of the GRail transaction. As a result of removing GWA from the credit facility, G&W will not include GWA’s debt, interest cost or EBITDA in determining compliance with the financial covenants under G&W’s credit facility but will include cash distributions received from GWA; G&W expects these changes and this transaction will not have a material effect on G&W’s leverage.

G&W Advisors

Bank of America Merrill Lynch served as financial advisor. Allens served as legal advisor on the GRail acquisition and formation of the GWA partnership, and King & Wood Mallesons served as legal advisor on the Australian debt financing.

MIRA Advisors

Macquarie Capital served as financial advisor. Norton Rose Fulbright served as legal advisor.

The following tables set forth reconciliations of each of these non-GAAP financial measures to their most directly comparable GAAP measure ($ in AUD in millions).

GWA Adjusted Net Income Reconciliation

GWA Adjusted EBIT and EBITDA Reconciliation

GWA Combined EBIT and EBITDA Reconciliation

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