Anti-Trust Regulator Rules Against Merger of Leading Rail Companies LADB Staff

University of New Mexico UNM Digital Repository

SourceMex Latin America Digital Beat (LADB)

5-22-2002 Anti-Trust Regulator Rules Against Merger of Leading Rail Companies LADB Staff

Follow this and additional works at: https://digitalrepository.unm.edu/sourcemex

Recommended Citation LADB Staff. "Anti-Trust Regulator Rules Against Merger of Leading Rail Companies." (2002). https://digitalrepository.unm.edu/ sourcemex/4514

This Article is brought to you for free and open access by the Latin America Digital Beat (LADB) at UNM Digital Repository. It has been accepted for inclusion in SourceMex by an authorized administrator of UNM Digital Repository. For more information, please contact [email protected]. LADB Article Id: 53095 ISSN: 1054-8890 Anti-Trust Regulator Rules Against Merger of Leading Rail Companies by LADB Staff Category/Department: Mexico Published: 2002-05-22

The government's anti-monopoly commission (Comision Federal de Competencia, CFC) has ruled against a proposed merger between Ferrocarril Mexicano (FERROMEX) and Ferrocarril del Sureste (FERROSUR), Mexico's second- and third-largest private rail companies. FERROMEX is a subsidiary of mining company Grupo Mexico and FERROSUR is a unit of business conglomerate Grupo Carso. The two rail companies first proposed the deal in late January to consolidate FERROMEX's northwest operations with FERROSUR's southeastern routes (see SourceMex, 2002-02-06).

In proposing the merger, the two rail companies argued that the consolidation of their operations would increase efficiency in Mexico's rail system and create increased competition by creating an alternative to Mexico's leading rail company, Transportes Ferroviarios Mexicanos (TFM), a subsidiary of ocean transport giant Transportacion Maritima Mexicana (TMM). TFM operates the lucrative routes connecting the northeast with Mexico City. "We believe the merger will respect the spirit of privatization and generate competition," said Grupo Mexico's vice president of public affairs Juan Rebolledo.

The FERROSUR-FERROMEX argument did not convince the CFC, which ruled in early May that the merger would reduce options for shippers and result in higher costs. "This merger represents a concentration of economic power that is prohibited under the provisions in the Ley Federal de Competencia Economica," CFC spokesman Manuel Sandoval said in a brief statement to reporters.

TFM, which failed in a bid to acquire FERROSUR in 2000, also lobbied heavily against the FERROMEX-FERROSUR merger. TFM, which is partly owned by US-based Kansas City Southern Industries, said a merged company would gain 64% of all domestic rail traffic and effectively shut out TMM from many medium-sized and large cities in central and northern Mexico.

Additionally, TFM spokespersons argued that a merger risked transferring control of strategic rail operations in the Isthmus of Tehuantepec to the foreign partners of Grupo Mexico and Grupo Carso. The Isthmus of Tehuantepec connects the Gulf of Mexico and the Pacific Ocean and is considered as economically strategic as the Panama Canal. US-based Union Pacific, a partner in FERROMEX, recently expressed interest in expanding its ownership share in the Mexican railroad. Federal government supported merger The CFC rejected the merger despite support from the Secretaria de Comunicaciones y Transportes (SCT). Just weeks before the commission's decision, the SCT issued a report on the benefits of a consolidation of the FERROSUR and FERROMEX operations. "This alliance is not only legal, but it would promote competition, encourage the modernization of the country's rail-cargo system, and reduce costs for shippers," said the SCT report.

The Mexican Congress generally opposed the merger, but the alliance was strongly endorsed by Deputy Francisco Patino Cordoba, a member of the transportation committee (Comision de Transporte) in the lower house. "This alliance will strengthen the rail-cargo system, which in turn will boost our country's economic development and industrial expansion," said Patino Cordoba, a member of the former governing Partido Revolucionario Institucional (PRI). In particular, he said, the plan would help create competition for the strategic route between Mexico City and the seaport of Veracruz.

But some private analysts said the merger was less about control over the Mexican rail system and more about finding a way to capitalize Grupo Mexico, which has lost money because of a depressed mining sector. The Mexican mining company has accumulated US$2.7 billion in debt because of a sharp drop in the price of copper in 2000 and the acquisition of financially troubled US mining company Asarco. "The railroad is a logical source of funds to recapitalize Grupo Mexico's mining subsidiaries, seeing that it is profitable, valuable, and underleveraged," analyst Aaron Holsberg of New York-based J.P. Morgan said in an interview with The New York Times.

Analysts said an approval would have yielded other financial benefits for the parent companies of FERROMEX and FERROSUR. "An approval would have maximized the value of the business transactions of Grupo Mexico and Grupo Carso, which needed to consolidate and reduce their costs of operations," said analyst Jorge Beristan of Deutsche Bank Securities in New York. (Sources: Notimex, 05/01/02, 05/16/02; The New York Times, El Financiero, 05/16/02; El Universal, 04/24/02, 05/02/02, 05/16/02, 05/17/02; Novedades, 04/24/02, 05/15/02, 05/17/02; La Cronica de Hoy, 05/02/02, 05/10/02, 05/14/02, 05/17/02; Reforma, 05/02/02, 05/17/02; Reuters, 05/10/02, 05/16/02, 05/17/02; Associated Press, 05/19/02; Milenio Diario, 04/26/02, 05/02/02, 05/10/02, 05/14/02, 05/17/02, 05/21/02)

-- End --