The railroad deal that couldn't go through

Across the border
The railroad deal that couldn't go through

MEXICO CITY — Bewilderment reigns on Mexico’s railroad scene now that the majority shareholders of Transportación Ferroviaria Mexicana (TFM) (www.tfm.com.mx)— Jose Serrano, chairman and CEO, and Javier Segovia, president — have backed away from what had been deemed a done deal.

The two had agreed to sell their shares to TFM’s partner, U.S.-based rail company Kansas City Southern (KCS) (www.kcsi.com), and a new concept in North American rail connections was to have been born — NAFTA Rail. After the deal fell through, KCS immediately filed a preliminary injunction to force the sale.

Logistics Today has sought an explanation from Serrano and Segovia, to no avail. They seem to have locked themselves up in their ivory tower in southern Mexico City. At this point, they will only respond to a court mandate.

However, Warren Erdman, vice president for corporate affairs for KCS, agreed to explain his railroad’s side of the story. Erdman says the relationship between KSC and TFM is governed by a transaction agreement signed by officials of both companies. Simply stated, KCS is to acquire TFM. Contained in the agreement is a clause permitting one party to serve the other with notice of a dispute within 60 days of an issue of contention being raised.

“We served notice in late August that we were pursuing resolution,” says Erdman. “When that 60-day period ends, if we have not satisfactorily resolved the matter, the parties will go to an arbitration process to be held in New York under Delaware law.”

Erdman explains that KCS and TFM had agreed to submit the issue under Delaware corporate law as stated in the original purchase contract.

In Mexico, three of the four government institutions overseeing the process — the Secretariat of Communications and Transportation, the Economics Secretariat and the Federal Competition Commission — had given the green light to the transaction. All that was missing was permission from the Foreign Investment Commission, which was about to be given when news arrived of Serrano and Segovia’s refusal to sell.

North of the border, the U.S. Department of Justice had given its approval to the deal. It was generally expected that the contract was now virtually complete. With all the votes assumed to be in favor of the deal, the question every- body is now asking is, “What happened to kill the deal?”

“Some 14 months earlier, the partners-to-be began the negotiating process,” Erdman says. “During that time, the principals — Serrano and Michael Haverty, chairman, president and CEO of KCS — discussed, negotiated and reached agreement on every detail of the rail transaction. Under terms of the agreement, Serrano and the TFM Group would have been the single largest shareholder with a very significant economic interest. After every provision of the contract was negotiated and agreed upon, they signed it, obligating themselves to the transaction.”

Both companies agreed to pursue regulatory approval in their own countries, and both engaged in that effort, eventually gaining the needed okays in both countries.

“We were within 10 days of the announce-ment of the Mexican government decision,” Erdman continues, “when TFM shareholders surprised us, their own shareholders, and almost everyone in Mexico and the U.S. — by voting against final approval of the transaction. This was especially surprising to us because these were the same people who had signed the deal obligating them to recommend it. Now, overnight, they had changed their minds.”

Many in Mexico figure Serrano and Segovia acted out of desperation because of the condition of Grupo TMM (www.tmm.com.mx). Ownership of TFM is a complicated mixture, with 20% owned by the Mexican government. Of the remaining 80% of TFM, 51% is owned by Grupo TMM and 49% by KCS. TMM has been foundering financially for the past six months, and earlier this year had to sell its operational concessions at Mexico’s main ports to Stevedoring Services of America.

Now, by not selling its shares in TFM, it is thought by Mexican observers that TMM is desperately hanging on to the last available plank before the entire ship sinks.

Erdman declines to speculate due to the litigation underway.

The KCS position remains that the creation of NAFTA Rail would be a positive development for both companies. If the deal had been consummated, it would have created a new company, twice its present size, with TMM the largest single shareholder.

Regardless of the current legal dispute, daily operations of TFM are conducting business as usual. “Since we took control of the railroad in 1997,” observes Erdman, “we have enjoyed growth, have invested $1 billion in maintenance and are quite happy with the way operations are going.”

For now, TMM is in financial trouble and some speculate that Serrano and Segovia are aiming at having the Mexican government rescue them from the debt suffered by TMM, not TFM.

The waiting period for the preliminary injunction will soon expire, and most likely both companies are in for a long legal battle in which, because of its signed contract, KCS may walk away with the legal victory. LT

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November, 2003

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