A more fortuitous time for fusión?

By Pat Foran, Editor

While Grupo México, majority owner of 5,245-mile Ferrocarril Mexicano S.A. de C.V. (Ferromex) intends to acquire the 917-mile Ferrosur S.A. de C.V., Kansas City Southern de México S.A. de C.V. (formerly TFM) plans to help persuade Mexico’s Comisión Federal de Competencia (Competition Commission) to put the kibosh on it — just as the agency did when Ferromex and Ferrosur tried to pair up in 2002.

To an extent, “change” has been the theme in post-privatization Mexico during those three-plus years, most recently at KCS-TFM, where the ownership shift shake-out figures to be another key ‘06 subplot. But what hasn’t changed much is rail’s market share vs. truck’s, which continues to pale in comparison. That alone, Ferromex officials figure, gives them a better shot at making the Ferromex-Ferrosur Fusión II stick.

“It should not be accepted that in Mexico, rail transportation’s share of the market still is only 17 percent,” says Ferromex Chief Commercial Officer Rogelio Vélez. “That is what we are saying to the Competition Commission.”

In a Nov. 24 filing, Grupo México spelled out the plan: Grupo México subsidiary Infraestructura y Transportes Mexico (ITM) would create a new subsidiary of its own — Infraestructura y Transportes Ferroviarios (ITF) — that would acquire 100 percent of Ferrosur from Grupo Carso S.A. de C.V. and Grupo Carso unit Inbursa in exchange for a 25 percent stake in ITM worth $307 million. ITM owns 74 percent of Ferromex; Union Pacific Railroad owns 26 percent.

Shared assets, shared resources
The transaction would enable the roads to share resources, including a single sales force and customer service center; numerous intermodal, automotive and transfer terminals; 679 locomotives; and 8,535 freight cars. The combined road would be able to provide direct connections between the ports of Manzanillo and Veracruz, and bypass ever-congested Mexico City.

“Our focus has been on making sure the customers understand what we are after — and that they receive the information directly from us, rather than other sources,” says Vélez. “They want more service options, more equipment options, more infrastructure options. So far, the overall opinion has been very positive.”

Now, Grupo México needs a similarly favorable review from the Competition Commission, which by law has 60 days to respond to the filing. History suggests the commission “might take a little more time” than that to render a decision, Vélez says.

KCS de México objects
Ferromex’s chief rival certainly didn’t waste time weighing in. Last month, KCS de México filed its opposition with the commission.

“When we bid on the [TFM] concession back in 1996, it was clearly stated there would be no merger between the railroads and nothing has changed to make that any different today,” says KCS Assistant Vice President Investor Relations Bill Galligan. “We feel it would be anti-competitive — for us and for shippers.”

Vélez disagrees: “We are in a different situation, especially because of the TFM/KCS transaction,” he says, referring to KCS acquiring full ownership of TFM last year.

Meanwhile, officials at the 1,119-mile Ferrocarriles Chiapas-Mayab S.A. de C.V., which connects with Ferrosur, were assessing competitive concerns of their own last month (in addition to contending with daunting hurricane-related infrastructure issues).

“The fact that Ferromex would take over Ferrosur is not a bad thing,” says Chairman Larry McCaffrey. “The question is: What would it mean for us?”

Other issues that could factor into the equation include control of terminal road Ferrovalle, of which KCS, Ferromex, Ferrosur and the government own 25 percent shares; the fervor with which KCS presses its objection; and the extent to which commissioners are rankled about the way Grupo México forged ahead with the deal. Ferromex execs already are calling the shots at Ferrosur. (“No more decisions are being made without consulting us,” Vélez says. “We are looking at operating efficiencies that could be achieved right away.”)

If the commission strikes down the deal, it “could probably force us to get rid of Ferrosur, but they cannot prevent Grupo Carso from participating with us” in other ways, Vélez says, citing trackage rights or other operational agreements. In post-privatization Mexico, such deals have been rare, but they remain the type of cooperative ventures the rail mode would need to begin taking freight traffic off Mexico’s highways.

Ferromex execs figure to spend the weeks ahead accentuating the deal’s positives and preaching the rail-growth gospel.

“We see opportunities everywhere,” Vélez says.