Brookfield, Oaktree eye Aurizon’s East Coast Rail

Aurizon’s East Coast Rail business could soon be controlled by Brookfield and Oaktree. Picture: Kevin Farmer

North American private equity firms Brookfield and Oaktree are believed to be in the mix to buy Aurizon’s $1bn East Coast Rail business.

Brookfield, based in Canada, and Oaktree, based in California, are two funds that are open to investing in coal-related assets and the understanding is both have expressed interest in the business, with at least one thought to be on the shortlist.

Both target assets unpopular to mainstream buyers, which operate in an out-of-favour sector or require a turnaround, and they aim to buy at bargain prices and reap a windfall through a restructure or simply holding on to an asset until the time is right for divestment.

Brookfield is no stranger to the Australian freight investment market, being the owner of the rail track infrastructure used for freight in Western Australia since 2006.

Aurizon inherited East Coast Rail through its acquisition of One Rail Australia for $2.35bn, which it finalised on July 29.

The Queensland-based haulage company is due to have short-listed bidders by now and is expected to reach a decision between November and December on whether to sell or demerge the operation.

East Coast Rail will no doubt be a key area of focus for Aurizon’s annual meeting in Townsville next Thursday.

The $6.4bn Aurizon, which counts Queensland institutional investors like QIC, Solaris and DNR among its shareholders, is working on the sale of the business through Goldman Sachs as a condition of approval for the One Rail purchase by the Australian Competition and Consumer Commission.

Ten parties have shown interest in East Coast Rail and the suitors are said to include some well-known names to the local market, including parties involved in the coal supply chain and private investors, as well as family offices and others.

Some suspect that cashed up coal miners like New Hope or Ensham could be in the mix, replicating a move by Glencore, which has owned both coal haulage companies and coal mines.

The attraction of East Coast Rail is that it can pass on costs to customers and has a steady income with 10-year regulated tariffs, with the average tariff at $5 a tonne.

Like most logistics companies right now, costs are a struggle with train drivers commanding annual salaries of between $180,000 and $200,000 amid a national labour shortage.

East Coast Rail services the needs for 40 mines and 30 per cent of the volume hauled is thermal coal.

Overall, Aurizon made a $513m net profit for the 2022 financial year, down 15 per cent from the previous year as it was hit by bad weather and contracts ending.

But earnings from hauling coal improved at a time when the price of the commodity is soaring despite concerns about its impact on the environment.

The funds used from the coal haulage sale will be used to lower its $5bn liability pile and reduce its 53.7 per cent gearing level.

East Coast Rail, which may be demerged rather than sold, will carry about $500m of debt with a BBB- rating.

Aurizon has silenced suggestions banks are unwilling to lend to companies involved in coal, with eight banks funding East Coast Rail and 10-year financing sourced from the US private placement market.

Aurizon is the country’s largest haulier of bulk freight and commodities and transports most of the grain from the West and South Australian markets, moving about 60 per cent of all grain carried by rail. CBH is a key client responsible for 40 per cent of Australia’s grain exports.

Aurizon also carries copper reserves and phosphate rock.

East Coast Rail operates in NSW and Queensland.

For 2021, the unit generated $227m of revenue and $137m of underlying earnings and hauled close to 50 million tonnes during 2021 – the most in a decade.

Aurizon made $1.5bn of earnings before interest, tax, depreciation and amortisation for the 2022 financial year and has issued guidance that it will be between $1.47bn and $1.55bn for the 2023 financial year.