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Brookfield Infrastructure Partners Makes a Big Bet to Broaden Its Rail Business

Matthew DiLallo, The Motley Fool

Brookfield Infrastructure Partners (NYSE: BIP) has been doing lots of wheeling and dealing over the past year. The global infrastructure giant is reshuffling its portfolio by selling mature businesses and using the cash to invest in opportunities with more upside. On Monday, the company announced its latest deal: It's participating in a transaction to take regional railroad operator Genesee & Wyoming (NYSE: GWR) private.

The acquisition will broaden Brookfield Infrastructure's rail operations while adding another growth engine to its portfolio.

The sun shining on railroad tracks.

Image source: Getty Images.

Details on the deal

Brookfield Infrastructure is partnering with GIC (Singapore's sovereign wealth fund) as well as institutional partners of its parent Brookfield Asset Management (NYSE: BAM) to acquire Genesee & Wyoming in a deal valued at about $8.4 billion, including the assumption of debt. It will invest about $500 million into the transaction, which it will fund with its $1.9 billion of current liquidity. The buyers are paying $112 per share in cash for Genesee & Wyoming, which is a 39.5% premium to its price on March 8, the day before reports surfaced that the rail operator was open to a deal. The company expects to close the transaction by the end of this year or in early 2020.

How Genesee & Wyoming fits into Brookfield's portfolio

"This is a rare opportunity to acquire a large-scale transport infrastructure business in North America," said Brookfield Infrastructure's CEO Sam Pollock about the deal. He further noted that:

G&W will be a significant addition to our global rail platform and will expand our presence in this sector to four continents. G&W provides critical transportation services to more than 3,000 customers, and its cash flows have proven to be highly resilient over many years. 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.

Genesee & Wyoming owns or leases 120 freight railroads that control more than 16,000 miles of track, which it has organized into eight operating regions. The company's six North American regions include more than 13,000 miles of track across 41 U.S. states and four Canadian provinces. The company's Australian region, which is part of a joint venture with Macquarie Infrastructure, operates 1,400 miles of track in that country. Finally, Genesee & Wyoming's U.K./Europe region consists of one of the U.K.'s largest freight rail businesses as well as a regional rail operation in Continental Europe.

That global rail portfolio fits well within Brookfield Infrastructure. The company currently has rail operations in Australia and South America that control more than 6,400 miles of track. The addition of Genesee & Wyoming will enhance its Australian business while boosting its rail presence to four continents, including a giving it a sizable operation in North America.

Trains at a rail station with the sun setting in the background.

Image source: Getty Images.

The reacceleration is well under way

Brookfield Infrastructure's growth engine hit a speed bump last year after it sold a large-scale Chilean electricity transmission business. However, cash flow is on track to grow at an accelerated rate over the coming quarters. That's because the company has since put the proceeds from that sale to work on a half dozen acquisitions.

The company has since started a second capital recycling phase, which should enable it to continue growing at an accelerated pace. It aims to sell between $1.5 billion and $2 billion worth of assets by the end of next year, and use the proceeds to invest in more attractive opportunities. The company has already sold a stake in its Chilean toll road business for $356 million, and its interest in a European bulk port operation for $130 million. On the purchasing side, in addition to the pending $500 million investment in Genesee & Wyoming, it's also is taking part in a deal announced recently with its parent Brookfield Asset Management and New Zealand's Infratil to acquire Vodafone's telecom business in New Zealand. It will invest $200 million into that transaction, which will enhance its data infrastructure operations. These investments will not only provide near-term cash flow boosts, but enable the company to grow earnings at a faster pace.

On track for fast-paced cash flow growth

Brookfield Infrastructure's distribution currently yields 4.7%. Its existing portfolio can organically grow its cash flow at a 6% to 9% annual rate, which would be sufficient to support management's target of increasing the distribution by 5% to 9% a year. However, the company's moves to upgrade its portfolio will enable it to accelerate its cash flow growth. That in turn could allow the company to increase its distribution raises above the high end of its target range. That improving potential makes Brookfield Infrastructure an even more compelling stock buy for income-seeking investors.

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Matthew DiLallo owns shares of Brookfield Asset Management and Brookfield Infrastructure Partners. The Motley Fool owns shares of and recommends Brookfield Asset Management. The Motley Fool recommends Brookfield Infrastructure Partners and Genesee & Wyoming. The Motley Fool has a disclosure policy.