Antitrust suit filed against Mexican shortline deal

Feb. 2, 2006
When the railroad line Ferrosur was sold last fall for $245 million in stock to mining company Grupo Mexico (which is controlled by Grupo Carso), the

When the railroad line Ferrosur was sold last fall for $245 million in stock to mining company Grupo Mexico (which is controlled by Grupo Carso), the deal was hardly looked on as just another transaction. In fact, some immediately objected to the deal as a breach of antimonopoly laws, since Grupo Mexico is a partner with the U.S.-based Union Pacific railroad. That carrier already owns Ferromex, a rail line that extends north from Mexico City to Nogales on the Arizona border.

Ferrosur is a shortline railroad running from Mexico City to the Port of Veracruz on the Gulf of Mexico coast.

When, in the late 1990s, the Mexican railroad lines were divested from governmental ownership, the system was broken into five main segments. In addition to the Veracruz and Nogales lines, there's a line on the northeast that goes to Nuevo Laredo, and a southwest line that ends at the city of Tapachula on the Guatemala border. The fifth line is strictly for Mexico City and environs, and is viewed more as a commuter network.

Juan Rebolledo, international investment vice president for Ferromex, is ecstatic over the acquisition since it would create a seamless crosscountry line for the railroad, with obvious advantages over competitors.

The leading competitor is Kansas City Southern de Mexico (KCSM), a newly formed company that now controls the NAFTA railroad, the line that flows northward from the port of Lazaro Cardenas on Mexico's Pacific coast and links up with the Texmex railroad, which moves cargo to the rest of the U.S.

It came as no shock that KCSM filed an antitrust-suit against Grupo Mexico with the Mexican Federal Competition Commission. The matter has been accepted as a valid complaint and will be given a hearing. The Commission is slated to rule on it by the end of February.

For Ferromex's Rebolledo, the suit is unwarranted, claiming Grupo Mexico has every right to own the added line and in the end will win out

In KCSM's view the deal is contrary to free trade, creates market "distortions" and serves to decrease competitiveness in railroad cargo business.

Since the privatization of rail business, both Ferromex and Transportacion Ferroviaria Mexicana (as KCSM was previously known) have logged dozens of complaints against each other for not allowing one another free transit on their tracks by means of charging extremely high tariffs. An increase in the number of incidents is anticipated. In the past, Ferromex made many attempts to acquire Ferrosur and has faced litigation for those efforts.

In a statement, KCSM claims it "is confident the Federal Competition Commission will oppose this transaction just as it did in 2002. KCSM sees nothing to indicate that competitive conditions under which the Mexican railroad industry operates have changed since that then."

From a purely business point of view, the $245 million in stock paid by Grupo Mexico to Grupo Carso for Ferromex is considered by Ixe Bank analysts as a good investment. If the Federal Competition Commission allows the takeover, anticipation is that Ferromex profits would increase to $30 million a year.

Grupo Mexico, which only recently entered the railroad business, is owned by the Larrea family, whose core industrial activity is centered on Mexico's copper mining, where they have a virtual monopoly.