Notable Mergers and Acquisitions 10/20: (GWR) (XGTI) (STI)

October 20, 2016 9:41 AM EDT

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*** 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$ in millions GWA(a) Incremental GRail(b) GWA Combined
Revenue A$290 A$100 A$390
Net Income (4) NM ~(4)
Adjusted Net Income 22 NM ~22
Adjusted EBIT 42 58 100
D&A 38 42 80
Adjusted EBITDA 80 100 180
Average Sustaining Annual Capital Expenditures 20 5 25

(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.

Sources A$ in millions Uses A$ in millions
New AUD Bank Debt A$690 Purchase GRail A$1,140
MIRA (equity & SH loan) 644 Repay GWA Term Loan 250
GWA Equity (contributed) 597 GWA Equity (contributed) 597
New Cash from G&W

88

Transaction Costs

32

Total Sources A$2,019 Total Uses A$2,019

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.

*** xG Technology, Inc. (Nasdaq: XGTI) announced that it has entered into a binding agreement to acquire the assets of the Vislink Communication Systems ("Vislink") division from Hungerford, United Kingdom-based Vislink, Plc. The purchase is expected to close by year-end 2016. xG had previously entered into a letter of intent ("LOI") with Vislink Plc, and is now pleased to announce its binding agreement to acquire Vislink.

Vislink Communication Systems, which has a present year sales run rate that is expected to be between $45M-$50M, specializes in the wireless capture, delivery and management of secure, high-quality, live video from the field to the point of usage, or "from scene to screen." Vislink delivers global solutions comprising hardware and related services to two core markets: broadcast & media and public safety & surveillance. In the broadcast & media market, Vislink provides broadcast communication links for the collection of live news, sport and entertainment events. In the public safety and surveillance markets, Vislink provides secure video communications and mission-critical solutions for law enforcement, defense and homeland security applications.

Roger Branton, CFO and Co-founder of xG Technology, said, "We believe that Vislink chose to sell the division to a purchaser that would operate the business as a going concern, versus financial acquirers. We further believe that the combined business will create a market leader in video technology providing scale and global reach. Considering the inherent synergies with our business unit Integrated Microwave Technologies, we believe the fair value of the ongoing business and assets far exceeds the purchase price."

*** SunTrust Banks, Inc. (NYSE: STI) announced it has signed a definitive agreement to acquire substantially all of the assets of the operating subsidiaries of Pillar Financial, LLC. The assets include Pillar's multi-family lending business, which is comprised of multi-family affordable housing, healthcare properties, senior housing, and manufactured housing specialty teams. The assets also include Chicago-based Cohen Financial's commercial real estate investor services business, offering loan administration and advisory services, as well as their mortgage banking business. Pillar is one of a select group of independent Agency lenders that holds licenses with all three agencies: Fannie Mae, Freddie Mac and the Federal Housing Administration. The acquisition of the Agency multi-family lender strategically expands the commercial real estate capabilities of SunTrust.

"This acquisition will enhance our commercial real estate platform by providing our clients with full access to the Agency programs currently licensed to Pillar. In addition, SunTrust will offer Pillar clients access to a number of expanded products and capabilities including bridge loans, equity for affordable housing developments, and a full suite of capital markets capabilities through SunTrust Robinson Humphrey," said Mark Chancy, SunTrust Wholesale Banking executive.

"SunTrust and Pillar make a fantastic combination since there is very little overlap in our capabilities, yet there is tremendous synergy and compatibility. Our management team is energized to serve our clients with the significant product offerings of SunTrust," said Anand Gajjar, CEO and senior managing director of Pillar Financial, LLC.

Following completion of the acquisition, the Pillar team will join the SunTrust Commercial Real Estate (CRE) line of business, which is part of the Wholesale Banking Segment. Gajjar will report to Kathy Farrell, Commercial Real Estate executive. CRE provides banking and capital markets solutions to commercial real estate developers, owners and operators on a national and regional basis through its SunTrust Community Capital, REIT, Institutional Real Estate, Homebuilder, Regional CRE, and Real Estate Investment Banking platforms.

The transaction is expected to close before year-end, subject to receiving Agency approvals and satisfying other closing conditions. Financial terms of the transaction were not disclosed. SunTrust Robinson Humphrey served as financial advisor to SunTrust for this transaction. Beekman Advisors acted as the strategic advisor for Pillar.

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