White paper · Executive summary
Buying Cash Flow Without Buying the Railroad
The concession as an alternative form of control for the operator, and a monetization event for the owner
The problem
Entry multiples have outrun the return math
Control of a Class II or Class III railroad clears 12x to 18x TTM EBITDA. At those levels an unlevered buyer is underwriting a mid-single-digit return.
| Entry | Enterprise value | Yr-1 FCF yield | Implied unlevered IRR |
|---|---|---|---|
| 12.0x | $120.0M | 4.5% | ~7.0% |
| 15.0x | $150.0M | 3.6% | ~6.1% |
| 18.0x | $180.0M | 3.0% | ~5.5% |
Illustrative: $10.0M TTM EBITDA, $3.0M maintenance capex, 24% cash tax, 2.5% perpetual growth.
An acquisition bundles four things
- Operating cash flow over a normal horizon
- The perpetual tail beyond it
- Residual land and right-of-way
- An auction premium set by infrastructure funds
Only the first generates the return being underwritten.
The structure
The term costs very little
A concession buys operating cash flow for a fixed term and declines the rest. At infrastructure discount rates, a 50-year term captures nearly all the present value of perpetual ownership.
Share of perpetual DCF value captured
What this means
An acquisition pays full price for a residual worth roughly five percent of the DCF, plus land the operator will never monetize.
The owner’s case
A monetization event that keeps the asset
The owner sells the cash flows and the operating risk for a defined term. Title, reversion and ultimate control stay where they are.
Upfront capital
A lump sum at close, unrestricted or ring-fenced, funding what the owner could not otherwise fund.
Committed capital program
Private investment in a public asset. No appropriation, no bonding capacity, no balance-sheet debt.
Ongoing revenue share
A multi-decade annuity that keeps the owner aligned with the asset’s commercial performance.
Ownership and reversion
The asset returns rehabilitated, recapitalized and commercially developed at private expense.
Precedent
Proven in rail, and already present in the U.S.
Mexico
1997
50-year concessions with 30-year exclusivity and a 50-year renewal option. Track and right-of-way revert to the state; concessioned assets cannot be encumbered.
Brazil
1996–98
30-year terms. Malha Paulista renewed early to 2058 for R$2.9bn in grants and R$6bn of investment. Malha Oeste ran to expiry and is in compensation dispute.
United States
Ongoing
Lease-and-operate is a routine class-exempt STB filing. Publicly owned lines run under modified certificates where only the operator holds the common carrier obligation.
Port of Brownsville · 2014
A U.S. rail concession in all but name
The Brownsville Navigation District, a political subdivision of Texas, retained title and granted OmniTRAX a 30-year Master Franchise Agreement over the Brownsville & Rio Grande International Railroad, with an obligation to develop a 1,200-acre industrial park on District land.
The decision
When a concession is the wrong structure
A concession is a wasting asset with no residual land, no salvage optionality, weaker collateral and a political counterparty for decades.
| Situation | Better vehicle |
|---|---|
| Public owner legally or politically unable to sell | Concession |
| Capital-starved asset needing heavy rehabilitation | Concession |
| Grantor optimizing for investment and service over price | Concession |
| Class I unwilling to sell, willing to divest operations | Concession |
| Thesis driven by industrial land development | Acquisition |
| Thesis requires abandonment or salvage optionality | Acquisition |
| Short hold, sale to a strategic or infrastructure fund | Acquisition |
Where the value of a rail asset lies in its land, its optionality, or its salability, buy it. Where the value lies in operating it well and investing in it, and the owner cannot or will not sell, the concession is the better instrument and frequently the only one.
About the author
Tim Eklund is Managing Partner of Rail-Industrial Partners, LLC. As Director of Acquisitions at OmniTRAX, Eklund led the team that entered into the 30-year Master Franchise Agreement with the Brownsville Navigation District for the Brownsville & Rio Grande International Railroad.
About Rail-Industrial Partners
Rail-Industrial Partners is a specialized investment and strategic advisory platform focused on the North American freight rail, rail services and rail-industrial sectors.
The firm’s partners and advisors have owned and operated shortline, regional and Class I railroads throughout North America, and carry global experience evaluating, structuring, and operating rail concessions.