The sale of the bankrupt Montreal, Maine and Atlantic Railway is all but certain at this point, but the buyer — Fortress Investment Group — remains mum on its reasons for wanting to acquire the bankrupt railroad or its future plans.
While Fortress may not be talking, the Bangor Daily News is able to piece together through interviews with experts and those familiar with the $15.85 million transaction an idea of what the investment firm may see in the railroad network, which consists of nearly 500 miles of track connecting Montreal with Bangor, Millinocket and Searsport.
This is not a case of a big-city investment firm swooping in to buy a railroad at fire-sale prices. Fortress has past experience operating railroads and sees this acquisition as a strategic purchase, according to experts who spoke with the BDN this week.
In fact, Fortress tried to buy MMA years before the tragedy in Lac-Megantic and the resulting bankruptcy, according to a source close to the company’s dealings who wished to remain anonymous.
RailAmerica, which was owned by Fortress from 2007 to 2012, approached MMA in 2010 or 2011 about acquiring the Maine railroad, according to this source. At the time, RailAmerica’s CEO was John Giles, the same John Giles who represented Fortress at Tuesday’s sale auction and is expected to operate the new MMA for Fortress once the sale is final, which it is expected to be by the end of March.
While Fortress’ past overtures didn’t go anywhere for “a combination of reasons,” the source said, they make clear that Fortress has had an eye on MMA’s assets for many years.
Fortress has a good reputation in the railroad industry, according to Chop Hardenbergh, editor of the trade publication Atlantic Northeast Rails and Ports. It purchased RailAmerica in 2007 and sold it to Genesee & Wyoming Inc. in 2012 for nearly $1.4 billion. But that’s not its prize piece, he said.
“[Fortress] neither bettered or worsened the reputation of the RailAmerica railroads,” Hardenbergh said. “There were positive things and some people say some negative things. I think the shining star for Fortress is the Florida East Coast Railway, which is highly regarded and a high-volume, high-speed railroad. It’s well run.”
Fortress isn’t heading into this deal blind. It began speaking with MMA’s customers at least a month ago, when it was negotiating a “stalking horse” bid of $14.5 million for the railroad with Robert Keach, MMA’s trustee during the bankruptcy proceedings. In bankruptcy proceedings, a stalking horse is chosen before the actual auction to ensure there’s a starting bid and a willing buyer if no better bids are received.
David Colter, CEO of GAC Chemical Corp. in Searsport, said Fortress approached him as an existing MMA customer to discuss the future of the railroad.
“I think they were just looking for how we are impacted by the bankruptcy and if they were the acquiring company what would we see as our rail needs now and in the future,” Colter told the BDN.
Given its proactive approach, the fact it has the capital to make it work and that it has past railroad experience, Colter said he looks at Fortress taking over the railroad as a “positive.”
He said MMA’s bankruptcy has caused service interruptions. Right now, GAC Chemical receives “steady inbound traffic” two days a week, Colter said.
“We’d love to see service five days a week,” Colter said, but he recognizes that will only be possible if Fortress is able to increase the total amount of traffic on that section of the line.
Because Fortress has declined to give interviews to the media following the MMA auction, what exactly they plan to do with MMA once the sale is final can only be guessed at.
We know, at least, that as part of the sale Fortress agreed to operate the entire railroad and not abandon any portion of it — at least in the near term. Here’s how the court order approving the sale, which was filed Friday, puts it: “the purchaser has expressed its commitment to operate a railroad over all of the assets that it proposes to acquire … as a going concern in the public interest, and has indicated that it has no present intention to abandon, discontinue or limit any of the railroad lines that it proposes to acquire pursuant to the agreement.”
Hardenbergh believes a major piece of their plan will revolve around oil. Specifically, he thinks the company will work hard to regain the business shipping oil from western Canada and the western United States along its corridor from Montreal to Brownville Junction in Maine, and from there to Irving’s oil refinery in Saint John, New Brunswick, which it lost after the disaster in Lac-Megantic. That traffic is currently moving up and around the crown of Maine on Canadian National’s rail network, Hardenbergh said.
“‘Potential’ is the word there,” Hardenbergh said. “The question is, will Canada or the province of Quebec have any say in crude oil moving through it on MMA’s line? If Quebec can put the kibosh on it, oil will continue to move up over Maine by CN to Saint John. My friends who are in Saint John say it’s just jam-packed with oil cars. So there’s no question there’s a lot moving by rail, it’s just not moving through Maine.”
But Fortress’ entire play for MMA can’t be predicated on its ability to move oil along its rail lines. There’s got to be a larger vision, and the fact Fortress saw value in MMA three years ago, and still sees value today, supports that notion.
David Cole, a former commissioner of the Maine Department of Transportation who now consults on trade and logistical issues, including with the Action Committee of 50, believes Fortress is making a bet on the future.
The value of the network is “more than just the volume currently on there,” Cole said.
The port operations at Searsport, which are connected to MMA’s line, have “untapped potential,” he said. Ships coming from Europe or South America — Brazil is closer to Searsport by sea than it is to New Orleans, he said — could come into Searsport and then move west on MMA’s lines to Montreal, which opens up trade to the entire Midwest region.
“Strategically, Searsport is valuable to niche players,” Cole said. “You’re not going to be New York City or Long Beach, but a relatively small amount of freight will have a big impact in Maine, economically speaking.”
Cole said railroads have a hard time surviving with only “indigenous freight.” He believes we have to look at the global picture to recognize the future value Searsport and MMA’s network could have.
“If you look at this region’s future economic development potential, all signs globally and nationally point to the fact jobs are being reshored back to America. Manufacturing is making a comeback and if we want to be a part of that we need to be on the path of commerce and freight. We need to be on these trade paths,” he said.
On a map, MMA’s network looks like a big funnel from the Northern Forest down to Searsmont. Cole said Thermogen Industries in Millinocket is a perfect example of a natural-resource-based company making an exportable product that could be moved over MMA’s rail lines to reach foreign markets. If Thermogen is successful at turning trees into torrefied wood pellets, a market for which is developing in Europe, the MMA network would be the natural path to send those pellets to Searsport and from there across the Atlantic.
Increasing east-west traffic will be key. The 70-mile stretch of track between Brownville Junction and Jackman can be seen as a burden or an opportunity. There are no customers on that section, which means it’s expensive to operate, but it’s the corridor that opens trade routes west to Montreal, and from there to the Midwest. So its survival will depend on Fortress attracting more east-west traffic.
“I believe our economic development is predicated on maximizing and leveraging these transportation assets we have from the deepwater port of Searsport all the way up to Montreal on this rail system,” Cole said.