Sometimes it's a CEO-to-CEO phone call that's needed to seal an M&A; deal.
No more bankers, no more accountants, no more input from internal strategy team members and other number crunchers. And definitely no more lawyers.
After almost a year of hard work, and with the numbers and sale contracts finely tuned to financial markets, it's down to the two head honchos whose careers could hang on what happens next.
So it was that Glencore's head of coal, an Australian called Peter Freyberg, picked up the phone and dialled Connecticut mid last month. At the other end of the line was Jack Hellmann, global chief executive officer of the $US4.5 billion ($6 billion) rail group Genesee & Wyoming.
Hellmann's Genesee – via a company it bought in 2015 called Freightliner Group – had hauled Glencore's coal in NSW's Hunter Valley for six years. Glencore's predecessor Xstrata was so upset with the incumbent coal carriers Pacific National and Aurizon that it built its own mine-to-port rail business, and contracted Genesee to drive and look after the trains.
But six years later, and with Glencore in the midst of an asset sales program aimed at reducing a whopping $50 billion debt, that business Glencore Rail ('GRail'), was on the block. Up for grabs was the right to carry 40 million tonnes of Glencore's coal to the Port of Newcastle each year, as well as its nine giant trainsets made up of 30 locomotives and 894 wagons.
Hellmann, as the GRail contractor and with ambitious expansion plans globally, was keen to jump from bidder most likely to new owner.
And then the phone rang.
Project Monty months in the making
For Genesee, a lot of hard work had been done to get to that point.
To lodge that $1.14 billion binding bid for GRail, Genesee had run buy-side, sell-side and financing deals simultaneously.
Under the watch of Genesee's London-based vice president of global corporate development, Matt Walsh, Genesee prepared a three-headed monster of a deal with three separate transactions handled in four different timezones. The team of bankers behind Walsh was headed by Bank of America Merrill Lynch Australian transport and utilities co-head Tom Butcher. Also on board was project financing expert Kevork Sahagian and Allens lawyers Richard Malcolmson and Vijay Cugati,
Firstly, Genesee had to acquire GRail, which it knew well and saw as a key stepping stone to grow its presence in the Hunter Valley and Queensland's coal regions.
It could have funded the deal with debt or equity, and considered both tracks.
But to compete with its rivals – and particularly Pacific National, whose new owners have a much lower cost of capital – it wanted to lower its own cost of capital. And the best way to do it was to find an equity partner.
So Genesee simultaneously ran an auction for a 49 per cent equity stake in its Australian rail business, which operates nearly 5000 kilometres of railways in South Australia and the Northern Territory, as well as contracted routes hauling cotton in New South Wales and iron ore for Arrium, among others.
Of course, the crown jewel would be the GRail business, should it be successful at auction. (GRail represents about one-quarter of Genesee & Wyoming Australia's (GWA's) revenue.)
And the third deal was to finance the new entity – 51 per cent owned by Genesee and 49 per cent owned by an unknown investor, and including a business which it had yet to bid for, let alone buy (GRail).
Glencore hired RBC Capital Markets to run the auction, dubbed Project Monty, with the team headed by metals and mining banker Adam Reid. King & Wood Mallesons partner Nicholas Pappas was on hand to oversee the legal work.
While GRail is technically a transport or infrastructure deal, its exposure is to Hunter Valley coal, so it was a natural fit for a metals and mining banking team. BAML's local coal expertise also helped land it the advisory role at Genesee, along with its relationship with Genesee in the US.
Train timetable has auction due to start
After considerable market sounding – and with particular attention on Glencore's post-sale relationship – the auction kicked off with the release of an information memorandum in June and first-round bids in July.
Meanwhile, Genesee had already started its own sell-down process, reaching out to infrastructure, private equity and pension funds that could be keen to take the 49 per cent equity stake in GWA.
GRail's first-round offers came and went and, predictably, it was the big three coal carriers into the second round.
Genesee, pitching its service levels and performance, was up against familiar foes Pacific National, which had about 50 per cent of the Hunter Valley coal haulage market, and Aurizon, the other 25 per cent.
Motoring along was the 49 per cent sell-down with Genesee taking Macquarie Group's MIRA, private equity investor Pacific Equity Partners and resources specialist First Reserve deep into the process. And at the same time, Genesee was taking Australian and offshore banks through its $740 million GWA debt package.
It's understood there were some tough negotiations along the way. There was plenty of attention on Glencore's 20-year 40-million-tonne-a-year haulage contract at GRail, while tyrekickers for the wider GWA were very interested in the company's exposure to the bankrupt Arrium and an ailing South Australian power network.
Despite the bumps – and a record number of conference calls between Sydney, London and Connecticut – it all came to a head in the second week of October, when Glencore called for binding offers.
Price and terms, price and terms
For Genesee, that meant a binding bid for GRail, along with a binding commitment from preferred equity investor MIRA – whose team was headed by Kieran Zubrinich – and a water-tight financing structure.
It was clear to all that it was a tight-run race. Every bidder had its strengths and weaknesses – the bids were all slightly different, as is usually the case.
After about a week of wrangling, Glencore decided it was time for a deal to be done. It was time for the respective camps of bankers, lawyers and coal experts to step aside and leave it to the principals.
So Freyberg picked up the phone to Hellmann. Apparently not a lot was said, but by the end of the call, lawyers were told the price and given about 12 hours to dot i's and cross t's. There was finally a deal to be done.
Genesee had tamed the three-headed monster. The $1.14 billion GRail acquisition is expected to complete next month.
