Former RailAmerica chief Marino sees bright future for Patriot Rail By MIKE SEEMUTH Special to The Palm Beach Post Sunday, June 15, 2008 BOCA RATON — Gary O. Marino is building another railroad business in Boca Raton. Marino formerly ran publicly traded RailAmerica, a Boca-based business started in the 1980s that grew to more than 40 short-line railroads before it was acquired for $630 million in 2007 by New York-based private equity fund Fortress Investment Group. Marino had served as RailAmerica's chairman since 1992, chief executive officer since 1994 and president since 1996 before retiring from all three posts in 2004. His background is in finance. From 1984 to 1992, he was chief executive officer of a venture capital firm called Boca Raton Capital Corp., and prior to that, he spent more than 15 years in commercial banking. Now Marino is the CEO of Patriot Rail, a two-year-old railroad holding company with an acquisition strategy similar to RailAmerica's. Since late 2006, Boca-based Patriot Rail has acquired five short-line railroads and plans to acquire more at a rate of four or five annually. Patriot announced its latest acquisition Tuesday, the Louisiana & North West Railroad, a short line with 68 miles of track from Louisiana to Arkansas, for an undisclosed price. Patriot now operates 321 miles of rail lines in seven states. Shipments hauled on Patriot's tracks range from grain, coal and forest product to steel and automobiles. Dressed casually in a blue dress shirt unbuttoned at the neck, no tie, Marino discussed Patriot's operations and prospects and rail industry developments during a wide-ranging interview at his privately held company's Boca Raton headquarters: You joined an investor group that acquired a short-line railroad in Michigan mid-1980s, your first investment in the rail industry. How did that work out for you? "I put up $100,000 of my own money to see if it worked ... We made money the first year." RailAmerica later acquired that railroad in Michigan and dozens more. How big did RailAmerica get? "We built RailAmerica to be the largest short-line regional railroad company in North America. We had 15,000 miles of railroad. ... We were earning $30 million, $40 million a year, so we proved that the model worked." Can you repeat your managerial success at RailAmerica as CEO of Patriot Rail? "It's the same industry. The dynamics haven't changed much ... Deregulation in 1980 made the rail industry a lot more competitive with trucking, and since then, the industry has been coming back ... There are truck driver shortages nationwide. It's not an attractive industry for a lot of people anymore." Do you run Patriot Rail differently than you ran RailAmerica? "This time we're decentralizing it and having most of the expertise in the field. ... It allows us to have a smaller staff here and run Patriot Rail more like a holding company." Is it easier to run privately held Patriot Rail than publicly held RailAmerica, which had to satisfy Wall Street's stock analysts every quarter? "They're all looking for fast increases in the price of the stock, and it's not generally possible in the railroad industry. It's a capital-intensive industry that has been around for 175 years ... You don't make major increases in earnings. It's slow and steady." How has the cost of fuel affected Patriot Rail and its competitors in the trucking industry? "There is no cheaper way to ship than by rail. The fact that truckers have to pay a lot on a percentage basis for fuel, that helps us ... They're clogging the lanes on the highways, and a lot of that business should be going by rail." How do rail and truck capacity compare? "One rail car can haul between three and four times what one truck can haul. The efficiency of rail transportation over trucking is huge." Can trucking companies compete effectively for coal, grain and other heavyweight freight moved on Patriot Rail's tracks? "Those are big things going long distances, and trucking just can't compete with that." What about trucking companies that move goods from coast to coast in the U.S. in just 72 hours?" Now trains can go coast-to-coast in 72 hours with a load of intermodal containers, and that's a huge business for the railroads ... You have all of these imported products coming in from China and Korea, and they are mostly coming into ports on the West Coast - toys, video games, everything." Your short-line railroad service complements that of larger coast-to-coast, or Class 1, railroads. Can you explain how this cooperative arrangement works? "We're collecting cars from various shippers - whether it be a grain shipper or a forest products guy, or coal - and we're assembling trains, taking two and three cars here, two and three cars there, and putting them into a train of 40, 50 cars. Then we take it 30, 40, 50 miles to the interchange point with our Class 1 partner, and then we hand it off to them as a train. And then they just add it onto their train and take it wherever it's going. So we're kind of like the retailer of the service, and they're kind of like the wholesale provider." So these large Class 1 railroads are far outnumbered by short-line railroads like yours? "There are still 550 railroads in North America, and the Class 1s, there are only six of those." How many short-line railroads in the U.S. are for sale? "Of these 550, RailAmerica now owns 42 or 43 or 44 railroads. and another public company called Genesee in Wyoming owns 42, 43 or 44, and the rest are owned by private individuals or small groups of private investors that are potentially for sale." What types of owners are motivated to sell railroads to Patriot Rail? "A lot of these small railroads are owned by moms and pops. We bought this railroad in Utah from a lady who had received the railroad as part of her divorce proceeding ... She said, 'Just give me the cash,' so we made her a wealthy woman." How much capital is needed to support a company like Patriot Rail? "At RailAmerica, during our acquisition program, we spent $750 million on purchases, on acquisitions, so you have to have that kind of capital to compete ... It really comes down to capital." How much does Patriot Rail rely on public money to fund rail line upgrades? "Many times, we can get the state and local governments to kick in some dollars. For example, in Tennessee, they've done that. They want to encourage rail to flourish." Besides sale prices, how much do acquisitions cost in terms of track maintenance? "The capital investment back in is pretty significant ... but we can control that pretty well, because were not running high speeds. We're not running long distances. So we don't need high-horsepower locomotives. We can go with the lower-horsepower ones, which are a lot cheaper." Connecticut-based private equity firm Plainfield Asset Management sponsored the startup of Patriot Rail after investing in RailAmerica. Why is Plainfield investing in your leadership again? "We made them a lot of money at RailAmerica." How many investment offers did you weigh before selecting Plainfield's proposal and starting to fully staff Patriot Rail? "We had nine proposals from nine different private equity funds. We went through all of them and chose one which gave us total autonomy. So we put the band back together."
