RailAmerica shares fall in IPO debut

NEW YORK — Shares of RailAmerica Inc., a North American railroad company that private equity firm Fortress Investment Group LLC bought in 2007, dropped Tuesday on their first day of public trading.

The Jacksonville, Fla.-based operator of short line and regional railroads in Canada and the U.S. set a price of $15 a share late Monday for the offering of 22 million of its shares. That raised $330 million before expenses.

But the offering price was below the company’s estimate last week that the shares would fetch $16 to $18 a share.

And RailAmerica shares fell $1.25, or 8.3 percent, to close at $13.75 in Tuesday trading after sinking as low as $13.55 earlier in the session.

Before trading began, expectations had been high for the stock as the recent market rally in equities encouraged a number of companies to go public. Analysts said investors see transportation companies as an opportunity, because they tend to lead the broader economy out of recession, and weakened transportation demand may soon revive.

Francis Gaskins, president of IPOdesktop.com, said the company prepared for its IPO by sharply slashing expenses and may have overdone it.

“In other words, investors can’t expect any more surprises on the cost-cutting side. There’s nothing else (management) can do to grow their top line revenue, without the economy helping,” Gaskins said.

John Fitzgibbon, founder of IPOScoop.com, had said last week that the planned RailAmerica IPO “should really ride the crest of the competition” and would attract attention because it would come to market at the beginning of a sparse week for IPOs.

But he said investors apparently got spooked at the last minute.

He said company insiders increased the number of shares they were offering by 1 million and cut the price. “That was enough to make investors head for the exit,” he said.

Fortress, which bought RailAmerica in February 2007, expects to own about 55.8 percent of RailAmerica after the offer closes Friday.

The company sold 10.5 million shares and a Fortress Investment Group affiliate sold 11.5 million shares.

In a filing with the Securities and Exchange Commission, RailAmerica said it believes opportunities to buy assets at good prices are increasing because of tighter credit markets and declining transportation volumes, which give other companies more incentive to sell. It also leaves a limited number of buyers to snatch up asset deals, the company said.

RailAmerica’s 40 affiliated railroads operate in 27 states and 3 Canadian provinces with about 7,500 miles of track. They transported over 1 million carloads of freight for 1,800 customers last year, hauling a variety of products; including farm equipment, food, lumber, paper, metals, chemicals, plastics and coal through relationships with other bigger railroads.

Last year RailAmerica earned $16.5 million on revenue of $508.5 million. In the first six months of this year, the company reported net income of $19.2 million on revenue of $206.5 million.

J.P. Morgan Securities Inc., Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and Morgan Stanley & Co. Inc. represent underwriters.

Underwriters received a 30-day option for up to 1.6 million additional common shares, and RR Acquisition Holding LLC granted underwriters the option for up to 1.7 million additional shares. The acquisition-holding company is owned by private-equity funds managed by an affiliate of Fortress.