|A Tough Climb for Georgia's Trains|
|April 18, 2012|
By HESTER PLUMRIDGE
The last time U.K. investors were offered shares in a rail operator was the Railtrack IPO in 1996. That experience didn't end well: The U.K. group was placed into administration in 2001 and liquidated the following year. But that hasn't deterred the government of Georgia from plans to float 25% of its national-railway group in London next month. Georgian Railway looks promising, but skeptical investors could find plenty of reasons not to climb aboard.
Georgian Railway's main business is carrying oil from Kazakhstan and Azerbaijan, the former forecast to be one of the world's fastest-growing oil producers until 2035, to the Black Sea Coast. From there, onward shipping routes to Europe are an alternative to transport through Russia. It is also expanding its freight capacity for industrial goods and building a new line to Turkey. The business is a monopoly setting its own prices: Operating margins of 54% are among the rail industry's highest. Earnings rose 72% to $104 million last year.
But it is no investment for the faint-hearted. Governments can change, and impose new pricing curbs. Georgia's relations with Russia and its breakaway regions South Ossetia and Abkhazia remain strained. A conflict in 2008 damaged rail assets. New oil pipelines could steal Georgian Railway's traffic. Its corporate governance doesn't yet comply with the U.K.'s code. And while currency risk is capped by hedging and charging its customers—including HeidelbergCement HEI +0.08% and BP BP.LN +0.25% —in dollars, it can't be eliminated entirely.
Of course, much depends on the price. Based on the lower end of valuations for peers including Russian group Globaltrans GLTR -0.06% and freight specialist Global Ports,which trade at around six to eight times forward Ebitda, a float could raise around $250 million, valuing Georgian Railway at about $1 billion. North American railroad operators like Canadian Pacific Railway CP -0.40% trade at nearer 10 times. Having shelved a planned IPO last year due to poor market conditions, Tbilisi mustn't be greedy if it is to keep this effort on track.
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