Cowen and Company Equity Research Analyst Matt Elkott, who covers the railway supply sector, on May 4 issued a report that looks favorably upon two potential combinations: Trinity and GATX, and Wabtec and GE Transportation.
“As Trinity embarks on its back-to-basics journey, we believe it could consider consolidation candidates including GATX,” Elkott notes. “As counterintuitive as it may seem, such a merger could not only make sense for the two companies, but help ease overbuilding and pricing challenges in the railcar industry. On the component front, a Wabtec-GE Transportation deal remains likely, in our opinion.”
The widely speculated combination of and GE Transportation remains “highly likely,” Elkott says. “The deal could occur for $6 billion, which is upon what we based our hypothetical accretion and financing analysis. Given Wabtec’s current leverage, we do not see debt issuance as the primary source of financing of a potential deal; big reliance on new equity would limit accretion beyond the company’s and investors’ liking, in our view.”
Cowen’s, hypothetical merger scenario consists of 40% new equity issuance, 30% new debt, and 30% GE equity maintained in its Transportation unit. Accretion would be $0.88 per share, or about 22% relative to Cowen’s 2018 EPS estimate “if Wabtec would have owned GE Transportation all of 2018. Accretion could increase in 2019 and beyond if provisions are in place for Wabtec to gradually buy back GE’s equity stake using operating cash flows from the business.”