Why Rail America's Shares Popped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of regional rail operator RailAmerica (NYSE: RA  ) were choo-chooing ahead today, gaining as much as 10% in intraday trading after Genesee & Wyoming (NYSE: GWR  ) agreed to buy the company.

So what: Genesee agreed to pay $1.4 billion, or $27.50 per share, for RailAmerica. The 11% premium for the buyout may not seem like much, but the price that Genesee is paying is almost 30% above the closing price on May 21, which was the day before RailAmerica announced that it was looking to sell itself.

The deal will put a significant amount of new debt on Genesee's balance sheet as it's gotten $2.3 billion in committed debt financing from Bank of America (NYSE: BAC  ) . It's also secured $800 million in equity financing from private-equity giant Carlyle Group (NYSE: CG  ) .

Now what: The deal here has one financial institution -- Fortress Investment Group (NYSE: FIG  ) , which owned a majority stake in RailAmerica -- getting out of the business, while two others, B of A and Carlyle, are jumping in. What should shareholders do? Since Genesee is doing this as a cash deal, shareholders can easily redeploy their money any way they want. As for riding along with the combined company, while I do like the general thesis around railroads and I dig Genesee's economic bullishness, the amount of debt that the company is taking on could make this a somewhat risky bet.

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