Brookfield Infrastructure (NYSE: BIP) and several partners are taking regional railroad operator Genesee & Wyoming (NYSE: GWR) private. The transaction will bolster Brookfield's transportation infrastructure business and increase to its cash flow. In this Industry Focus: Energy clip, host Nick Sciple and Fool.com contributor Matt DiLallo discuss:
- Why Brookfield Infrastructure is investing in Genesee & Wyoming
- How the business fits into Brookfield's portfolio
- Whether the deal meets Brookfield's focus on investing for value
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
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This video was recorded on July 11, 2019.
Nick Sciple: First story I want to talk about is, earlier this month, Brookfield Infrastructure Partners announced that it's going to participate in a transaction to take regional railroad operator Genesee & Wyoming private. They're partnering with GIC, that's Singapore's sovereign wealth fund, as well as institutional investor, partners with Brookfield Asset Management, buying the railroad $112 a share in cash, almost a 40% premium to the price it was trading on March 8th, the day rumors started swirling that this deal might happen. When you saw the news of this deal drop, Matt, what was your first reaction to see Brookfield acquiring this railroad?
Matt DiLallo: I wasn't too surprised. I've actually covered Genesee & Wyoming for several years for Fool.com. They were recommended by Stock Advisor. I know them pretty well. It's a good fit for them. Brookfield loves these backbone infrastructure businesses, and that's what Genesee & Wyoming does. They move freight basically from point A to point B, basically between the bigger railroads. They're kind of an intermediary. It fits in well with the globalization that Brookfield's looking for, because they're huge in North America, they've got railroads in Australia and Europe. It fits in very well with that.
It's not a typical Brookfield type transaction where it's all contractual cash flows. But it's very steady. It is economically sensitive, so it gives them that upside and downside with the economy. But it's a good deal for them. It bolsters their transportation segment, which is something they've been looking at. It's another good investment by Brookfield.
Sciple: Yeah, you look at these short line railroads, they serve some of that role as the last mile carrier. As we see more and more the way commerce is moving, there's more and more demand for those last mile services that folks like Genesee & Wyoming can help provide. When you look at the price that Brookfield paid, do you think they got great value here? There have been some grumblings from some investors that maybe Genesee & Wyoming undervalued its U.S. assets relative to maybe folks' impressions of their assets abroad. Do you feel like Brookfield was able to get an attractive valuation for Genesee, acquiring it today?
DiLallo: Well, I don't think Brookfield would ever do a deal where they didn't get a good value. I think that's what drew them to them. Obviously, the near 40% premium suggests that they paid a lot more than it was trading at the public market. However, Genesee & Wyoming has had some issues overseas. There's issues with the currencies and things like that. So that has been weighing on them. Weather has been an issue for them. The economy. While the global economy has continued to grow, railroads went through a speed bump about a year or two ago. That put pressure on them. They were able to get this for -- it's one of those, a good business for a fair price. It's not like a screaming bargain like they got in Brazil when they bought a pipeline, but it's a good deal.
Sciple: Right. This also adds to Brookfield's presence -- I think it's on almost all major continents now. They were previously in Australia. Obviously, they add Genesee & Wyoming's assets there in Australia. But now, that moves them into North America as well as some assets in Europe. Adding to that portfolio for Brookfield, is there any synergies bringing this in with the rest of their real assets, that they can leverage this and get more out of it than maybe the assets as they sit today?
DiLallo: There's some potential, especially in Australia, where Brookfield has done well and Genesee & Wyoming struggled a bit. There might be some synergies there. Maybe they'll end up combining those businesses. But North America is a separate thing. The U.K., Europe -- there might even be some synergies in the U.K. Brookfield has a good ports business over there. They just sold a European port business. That's not the same. So, yeah, there's some, but probably, as they do in a lot of cases, they'll operate this business separately. It's not like they're going to make this big global railroad giant. I don't see that happening.
Matthew DiLallo owns shares of Brookfield Asset Management and Brookfield Infrastructure Partners. Nick Sciple has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Brookfield Asset Management. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.