The NSW and Queensland assets will be sold off through either a demerger or trade sale.
One Rail is currently owned by Macquarie Asset Management and has estimated earnings of $220 million, but importantly it adds further diversification for Aurizon which is currently heavily reliant on Queensland coal.
However, the market was less than impressed and analysts were critical of the deal, particularly the possible cut to dividends to pay for the increased debt the deal would bring.
Aurizon will integrate the One Rail bulk and general freight into its own business. This includes Tarcoola to Darwin rail infrastructure, the South Australian regional infrastructure and its 400 employees.
Managing director Andrew Harding said the deal offered a unique opportunity to grow.
“The One Rail acquisition is highly strategic and transformative for Aurizon. It is fully aligned with Aurizon’s strategy to grow our bulk business into new markets and new geographies in Australia,” Harding said.
“The One Rail acquisition delivers a step change for Aurizon Bulk as a new entrant in South Australia and the NT region and supports the ongoing growth of non-coal revenue in the Aurizon portfolio.”
The company will commit to an enforceable undertaking with the Australian Competition and Consumer Commission to divest One Rail’s east coast rail which has a long term haulage contract with Glencore’s coal mines in the Hunter Valley.
The deal is expected to be completed by April next year.
Analysts were not overly impressed by the Aurizon strategy and its shares were sold off again this morning.
RBC Capital Markets said while diversification was the aim of this transaction, it was concerned about the impact on shareholders because the diversification was minimal and “arguably not as material as initially suggested’’.
“However, the execution is concerning given that the bulks business was only about 26 per cent of the earnings of the One Rail Group and that through this transaction Aurizon potentially now takes on excessive execution risk associated with the divestment/demerger of the East Coast Rail assets,’’ broker said.
“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
“Any discount applied to East Coast rail on a divestment or demerger would ultimately be borne by existing shareholders.’’
It said the increased to debt levels was “likely in our view to place material pressure on the division’s BBB+/Baa1 rating’’.
“With so much longer term uncertainty around the future of coal, we believe the only pillar of support for the stock to date has been the dividend and we note that is now to be reduced by up to 30 per cent in order to pay down debt.’’
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