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Rail group Aurizon has capped off another huge week of mergers and acquisitions with a $2.35 billion cash acquisition of freight rail group One Rail Australia that will help to haul more of the commodities used in a low carbon world, such as manganese and rare earths.
“This actually puts us into a situation where we’re freighting the commodities that are talked about and play a part of the future in a low zero emissions-type environment,” Aurizon chief executive Andrew Harding said.
Aurizon CEO Andrew Harding is trying to diversify the rail group away from coal. Attila Csaszar
More than $16 billion of M&A transactions were announced this week including Aristocrat Leisure’s $3.9 billion bid for UK gambling software and content supplier Playtech and HomeCo’s $2.8 billion deal to acquire rival ASX-listed property owner Aventus Retail Property Fund.
One Rail, which was formerly known as Genesee & Wyoming Australia and operates rail networks in South Australia, NSW and the Northern Territory and has been pushing into Queensland, has long been considered a likely acquisition for Aurizon.
It is buying the freight rail group, using debt to pay for the acquisition, from Macquarie Asset Management to strengthen its bulk haulage business and diversify away from its core coal haulage operations in Queensland and NSW.
The acquisition will allow Aurizon to operate the Tarcoola to Darwin Railway, which runs from South Australia to the NT, and haul commodities like copper, iron ore, grain, phosphate as well as manganese (used to make batteries) and rare earths.
The company hopes to pick up rail haulage contracts from mining projects and farms operating near the rail tracks and expects the acquisition to boost the contribution that bulk haulage makes to its total revenues to about 40 per cent.
The rail group has previously said that it wants to snare a 20-25 per cent market share of what it claims will be a $1.25 billion profit pool for bulk haulage by 2030.
If it hits these targets, Aurizon’s revenues from hauling thermal coal will drop to less than 20 per cent of overall rail haulage revenues by 2030.
Currently, about a third of haulage revenues are derived from thermal coal; the remainder is split between metallurgical coal and bulk freight.
Aurizon has been under pressure from investors and analysts to reduce the proportion of its earnings linked to coal, particularly the thermal kind, and its shares have underperformed the broader sharemarket.
To address competition concerns and secure regulatory approval for the deal, Aurizon will sell or demerge One Rail’s coal haulage businesses in NSW and Queensland, which have a long-term contract with miner Glencore.
The east coast businesses will operate separately from Aurizon with their own chief executive and management team until they are split off.
Aurizon discussed the transaction with the Australian Competition and Consumer Commission before announcing the deal on Friday, Mr Harding said.
RBC Capital Markets analyst Owen Birrell questioned the diversification benefits of the acquisition, pointing out that as a percentage of pro-forma fiscal 2021 earnings, Aurizon’s non-coal income would only have risen to 14 per cent from 9 per cent.
Aurizon could also struggle to sell One Rail’s Queensland and NSW businesses, Mr Birrell warned.
“Given the lack of investor interest in any coal exposed assets at present, we expect the pool of buyers is not likely to be too extensive and so a demerger is a possibility,” he said, adding that Aurizon may lower dividends as it pays down the debt used to make the acquisition.
Aurizon told shareholders that dividends were likely to be paid “at the lower end” of its forecast payout range (between 70 and 100 per cent of underlying net profit after tax) for the next 1-2 years.
Ratings agency S&P Global, which affirmed Aurizon’s BBB+ credit rating, said it expected it would take the rail group 12-18 months to sell One Rail’s Queensland and NSW businesses.
“If the divestment is not completed, it will likely affect our view on Aurizon Holdings,” S&P said.
The rail group’s shares dropped 17¢ to trade at $3.72 on Friday afternoon (AEDT). The stock is down 9 per cent over the past 12 months.
A lawsuit filed by Aurizon against One Rail’s former US owner, Genesee & Wyoming, in 2019, alleging that it breached existing agreements when it arranged to sell the Australian rail assets to Macquarie Infrastructure and Real Assets (MIRA) and Dutch Pension fund PGGM, is ongoing.
Aurizon has claimed that it has first right of refusal over any sale of the local Genesee & Wyoming rail operations because of an agreement struck in 2006 when it bought some West Australian rail assets then owned by Genesee & Wyoming and Wesfarmers.
The lawsuit argues that Genesee & Wyoming provided better terms and conditions for the sale of its Australian rail business to Macquarie Group than it did to Aurizon after putting the rail assets on the block for $627 million.
This article first appeared on www.afr.com
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