Mexican Rail Merger Denied Again

The refusal by the Mexican government's antitrust watchdog Federal Competition Commission (CFC, www.cfc.gob.mx) to allow a $300 million merger between railroad companies Ferromex (www.ferromex.com.mx) and Ferrosur (www.ferrosur.com.mx) was not welcome news for Mexican moguls German Larrea and Carlos Slim. For Ferromex owner Larrea, his dream of controlling more than half of Mexican railroads seems to be shattered forever. For Slim, Mexico's wealthiest tycoon, making a profit through the sale of Ferrosur will just have to wait until a different buyer, one who has nothing to do with Ferromex's Larrea, comes around.

Larrea will appeal the decision in what promises to be a long and costly case that will drag on for at least two more years in the pertinent courts, only to lose his case again.

For Michael Haverty, CEO of Kansas City Southern of Mexico (KSCM, www.kcsi.com), the news was sweet music. This was the second time he sued Ferromex for attempting to expand and the second time he won the case. Critics of the decision, certainly Ferromex officials, hinted that the CFC decision was aimed at benefiting KCSM. Commission president Eduardo Pèrez Motta rejects the accusation.

"Had we authorized the merger," he says, "there would certainly have been anti-competitive practices. Policies to establish rates could be modified at will which would fly in the face of the public's interest in maintaining competition."

Influencing the Commission's decision was Larrea's background and his passion for creating monopolies. In 1993, long before there was a Federal Competition Commission or he entered the railroad business, Larrea cornered Mexico's copper market. He was allowed to purchase for Grupo Mèxico, his mining consortium, the Cananea copper mine in the state of Sonora, which borders Arizona. Since then, Larrea has held a virtual monopoly over copper mining, owning 95% of Mexico's production. During the recent CFC proceedings it was often asked if Larrea and his group of investors would seek to take over the entire railroad industry.

Also weighing heavily in the decision was that Ferrosur's Carlos Slim, among the top 10 on the Forbes list of wealthiest individuals, is the owner of phone monopoly Telmex. He has moved Telmex away from bankruptcy into a money making venture. However, awarding him full control of Mexico's phone business by President Carlos Salinas (1988-1994) was never seen as a fair move.

In 1995, the ideological mandate for divestment of the government-owned Mexican railroad was, "no more Telmexes," meaning no one company would be permitted to control the full railroad network. The system was broken into five main lines.

"This is a well documented determination," says Pèrez Motta, "one that is clearly stated in the decision."

The upshot is that Ferromex and Ferrosur will remain separate companies, although last year Ferromex began managing Ferrosur through an outsourcing contract. It has expanded operations to more than 5,000 miles. The network runs from the California border to Guadalajara, and all the way across the country to the Gulf of Mexico port of Veracruz.

Ferrosur is a short line, interwoven in and around Mexico City. It controls the old rail line going to Veracruz and is still owned through legal force by Slim's Grupo Carso.

KCSM has full control of the line that crosses Mexico from the Pacific port of L·zaro C·rdenas directly to Chicago, which is the main Mexican and U.S. shipper import/export route for NAFTA trade.

Vladimir Saldana, a spokesman for KCSM, says the company will use all of its legal resources to support the antitrust ruling if Ferromex tires to overrule it.

The merger was never considered a major threat to KCSM, its rails seldom cross Ferromex lines. But wherever they do cross there is conflict. Ferromex has consistently overcharged for use of the right-of-way, creating ill feelings between the two operators.

More than the failed merger, the real issues are rates and rights-of-way. CFC will look into both issues over the next few months when it tries to establish fair trading laws for the three companies. The rules will be established apart and different from regulations for railroads in the United States.

Today railroad companies in Mexico are back where they started in the divestment years of the 1990s and will most likely continue that way until the 30-year concession period enjoyed by each company comes to an end.

Is the Ferromex-Ferrosur merger business much ado about nothing? Not exactly. For Mexico, an antitrust precedent has been set and two big money movers have been held at bay in their monopoly practices with the CFC prevailing over both.

Another major point of this story is that a U.S. company, KCSM, has prevailed twice and that CFC has respected its legal rights in the face of powerful Mexican nationals.

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