KANSAS CITY — Kansas City Southern exchanged a Mexican tax refund of 13 billion pesos ($1.2 billion) for the government’s 20 percent stake in its Mexican rail unit, settling an eight-year legal dispute and driving up shares 13 percent.
The value of the stake acquired by the Kansas City, Missouri-based railroad, also known as KCS, is 6.2 billion pesos including taxes. The company agreed in the settlement to forego 6.8 billion pesos of the refund, Mexico’s Finance Ministry said in an e-mailed statement. The transaction ends a court battle that stems from a tax overpayment made in the sale of the state- owned railroad in 1997.
“It accomplishes all of the objectives that KCS had hoped to achieve in this negotiation,” said Michael Haverty, chief executive of Kansas City in a statement.
Kansas City Southern now owns all of a 6,000-mile rail network linking the U.S. with Mexico’s largest ports, Mexico City and the industrial city of Monterrey in a country where exports are on pace to break $200 billion this year, a four-fold gain from before the 1994 North American Free Trade Agreement took effect.
Kansas City Southern shares jumped 13.4 percent, or $2.69 a share, to $22.80 at 1:57 p.m. New York time, the biggest gain since June 20, 2001. The stock rose as much 15 percent in earlier trading.
“Now there isn’t any minority interest,” said S. Scott Nicholls, a railroad analyst with Gilford Securities in New York. “It means Kansas City Southern will be getting 100 percent of the earnings of TFM instead of 80 percent.”
`Nafta Railway’
In April, the company paid as much as $720 million for a 43 percent stake in TFM, the Mexican rail unit, owned by Mexico’s Grupo TMM SA, which used the money to pay creditors after defaulting on $377 million of bonds in 2003. The transaction took two years to resolve after Grupo TMM scrapped the original purchase agreement, prompting Kansas City Southern to take its partner to arbitration in the U.S.
The Mexican government also had to make an exception to a law requiring railroads be controlled by Mexican companies.
The purchase of the Mexican railroad TFM has converted Kansas City Southern into the Nafta Railway, as it calls itself on its Web site, from a regional U.S. carrier.
“Now we can move forward with our ongoing capital investments in TFM, and focus on providing outstanding rail service along the Nafta rail corridor,” Haverty said in the statement.
Mexico’s Finance Ministry said the agreement puts to rest all legal obligations for the tax refund and the government’s option to sell the 20 percent stake to TFM’s owners. The government this year lost its last appeals against the tax refund, which had growth to 13 billion pesos because of accrued interest and penalties.
“Risks from legal actions now and in the future have been avoided,” the ministry said.
Grupo TMM and Kansas City Southern bought the state-owned railroad in 1997 for $1.4 billion during a push by the government to sell of railroads, steelmakers, banks, ports and other assets.