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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The Motley Fool owns shares of Bank of America and RailAmerica. Motley Fool newsletter services have recommended buying shares of Genesee & Wyoming. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Bank of America but has no financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter, @KoppTheFool, or on Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


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