Across the border: NAFTA Rail finally leaves the station

by Ricardo Castillo Mireles

After eight years of legal conflicts, the NAFTA Railroad has finally gotten underway thanks to the consolidation of three railroad companies: Kansas City Southern (KCS), the Texas-Mexico Railway Company (Tex-Mex) and Transportacion Ferroviaria Mexicana (TFM). Together they have created an integrated intermodal corridor between the Mexican west coast port of Lazaro Cardenas and Kansas City — a corridor that directly connects Asia to the U.S. via Mexico.

A little historical perspective: This opportunity for KCS came about in 1997 when the Mexican government divested itself of TFM, awarding it to Mexico's Transportacion Maritima Mexicana (TMM), a Mexican logistics operator that fell into financial dire straits by over-bidding by some $600 million on the purchase of TFM.

KCS soon became a shareholder of TFM, infusing it with state-of-the-art technology in order to modernize the 110-year-old railroad, which had fallen into disarray under Mexican government management.

KCS and TMM formed a partnership soon after divestment, but the heads of each company — Michael Haverty of KCS and Jose Serrano of TMM — instantly began fighting over the spoils, since KCS wanted the whole cake and so did TMM. There ensued a myriad of lawsuits and appeals until a NAFTA ruling went in favor of KCS. Serrano was forced to sell since TMM could not operate the line alone.

To add insult to injury, TMM fought the Mexican internal revenue service over a $200 million value-added tax (VAT) return. The Mexican government lost the case early this year, and now it not only has to pay back the $200 million, but interest accumulated over the past seven years as well, which brings the total settlement to nearly $1 billion.

As the storm subsided, TMM sold its shares to KCS earlier this spring for approximately $600 million in cash, with $47 million more to be paid in June 2007, $18 million in KCS common stock, as well as additional payments of $110 million in cash and KCS stock due to the favorable ruling on the VAT issue.

"The sale of our stock participation at TFM opens a new door in the history of TMM," says TMM chairman Jose Serrano. "By significantly reducing our debt, we have access to working capital and growth. We believe that by carrying out this sale, Group TMM is positioned to focus on its logistics operations, improve its cash flow and operational functioning. This transaction is in the best interests of the stockholders of TMM and will insure the growth and flexibility of TMM over the long haul."

TMM now owns 22% of KCS stock while the Mexican government retains 20% in TFM operations, but not of the entire 8,500-kilometer long line. TMM does not have the right to participate in daily hands-on operations of the NAFTA Railway.

Javier Segovia, TMM's CEO, says the deal is best for both TMM and KCS, since now his company can devote itself fully to its intermodal business while "the combination of KCS and TFM creates an efficient transportation route between the U.S. and Mexico, offering an integrated railroad service."

The NAFTARailway actually has been in existence since last December, when the Mexican government permitted direct passage of containers from Pacific Rim nations to the U. S. through the ports of Lazaro Cardenas and Manzanillo. However, it wasn't until last month that KCS could claim to be majority shareholder of the company, fully in control of the operation.

On the first day of KCS control at Lazaro Cardenas the air was full of hopeful predictions and good omens stemming not just from Haverty and the new TFM manager, Vicente Corta, but from other participants as well, including the local port authority, Hutchinson Ports officials who manage container cargo at the port, and federal and state authorities.

The first load for the NAFTA Railway was not especially significant in size. Just 10 containers arrived on May 13 from Shanghai on a Maersk Sealand container ship.

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