Mexican merger fever: mirroring activities in the U.S. and Canada, Ferromex and FerroSur are attempting to tie the knot. But rival TFM objects, and so do the regulators - so far - likelihood of a railroad merger in Mexico - Brief Article

Railway Age, June, 2002 by William C. Vantuono

Sooner or later, it was bound to happen: a merger attempt within Mexico's burgeoning railway industry. Five years ago, privatization of Ferrocariles Nacionales de Mexico began with the intent of creating a Mexican system that would be no different from the U.S./Canadian Class I network: modern, efficient, and profitable. After five years of heavy capital investment (about $2 billion) and strong traffic growth, Mexico's three principal carriers--Transportacion Ferroviaria Mexicana, Ferrocarril Mexicano, and Ferrocarril del Sureste--are doing exactly what many of their north-of-the-border counterparts have done. They're playing the merger game. And like the U.S. Surface Transportation Board, the Mexican government, specifically, the CFC (Comision Federal de Competencia, or Federal Competition Commission) has turned down a major merger application.

The 4,600-mile Ferromex (the country's largest in terms of route-miles and second in terms of traffic), 74%-owned by Mexican mining conglomerate Grupo Mexico and 26%-owned by Union Pacific, would like to merge with 920-mile FerroSur, 100%-owned by Grupo Carso, which is controlled by Carlos Slim (reportedly Mexico's wealthiest businessman). Two Grupo Carso subsidiaries, Empresas Frisco and Sinca Inbursa, would turn their shares of FerroSur over to Grupo Mexico subsidiary ITM (Infraestructura y Transportes Mexico) in exchange for 20% of ITM shares. But the CFC, invoking the provisions of Mexican railroad privatization legislation that limits to 5% the equity interest any one of the three principal carriers can have in any of the other concessions, said no on antitrust grounds.

Some industry analysts are saying that the real reason behind the Ferromex/FerroSur merger attempt is keeping Grupo Mexico solvent. Grupo Mexico is $2.7 billion in debt following a downturn in the copper market (copper mining is its principal business) and a $1.1 billion acquisition of Asarco, the largest copper mining firm in the U.S. Revenues from a combined Ferromex/FerroSur would help Grupo Mexico pay down debt and recapitalize the struggling mining business, while avoiding possible sale of additional Ferromex shares to UP, which controls about 80% of all U.S/Mexico cross-border rail traffic.

Grupo Mexico, saying it "is convinced of the clarity of the legal and economic arguments and the pro-competition effects of the transaction," is contesting the CFC's ruling. It is seeking an opinion from Mexico's STC (Secretaria de Comunicaciones y Transportes, or Communications and Transportation Secretariat), which has administered many of the country's privatization programs.

Mexican shipping conglomerate Grupo TMM, 51% owner of 2,600-mile TFM (Kansas City Southern owns thc remaining 49%), has been opposed to the Ferromex/FerroSur deal from the get-go. "The merger of these properties would subvert and challenge the spirit and objectives of the privatization process, and would lead Mexican industry down a path contrary to the interests of consumers and manufacturers," Grupo TMM said after the CFC's ruling.

Interestingly, three years ago, TMM bid on the FerroSur concession, which was the last of the three trunk lines to be privatized. That deal was shot down by the CFC. FerroSur, which connects Mexico City with the strategically important ports at Veracuz and Coatzacoalcos on the Gulf of Mexico, now provides 10% of TFM's business, including a substantial amount of finished automobiles from plants in the Puebla region southeast of the capital.

Meanwhile, Mexico's railroads continue to prosper and regain market share lost to trucks. TFM's operating ratio was 68% in 2001; Ferromex's was 82.5%. Interline alliances with U.S. and Canadian carriers for intermodal traffic are among many operational strategies designed to boost ton-mile market share above the 12% pre-privatization figure posted by FNM.

Burlington Northern and Santa Fe and Ferromex announced last month that they are offering the first integrated carload service that crosses the border at El Paso, Tex. Initially, the service is for such forest product commodities as scrap paper, lumber, plywood, and particleboard. Dock-to-dock pricing covers all services associated with the move, including car-hire within Mexico (Ferromex, like TFM, is an AAR member railroad and participates in the Interline Settlement System).

"El Paso represents the natural border crossing for all traffic moving to and from the Western U.S., and is an efficient Mexican gateway, benefiting customers," said Ferromex Vice President-Marketing Rogelio Velez. "Ferromex is committed to developing the El Paso/Ciudad Juarez gateway to provide shippers with an effective alternative to other south Texas gateways."

Another Ferromex success story is agricultural products. The railroad increased its traffic in corn, wheat, sorghum, and milo by about 50% last year by initiating shuttle unit trains with UP and BNSF and helping customers upgrade facilities to handle longer trains, according to Commercial Subdirector-Agriculture. Segment Terry McDermott. "We could get to the point where we will move 80% of the domestic crop; we move 40% now," he says. For import traffic, car cycle time between the border and customers has dropped dramatically, and cars don't get "lost" in the system any more.