(The following article by Randolph Heaster was posted on the Kansas City Star website on September 14.)
KANSAS CITY — A long-standing dispute between Kansas City Southern and the Mexican government was settled Tuesday, giving the company full ownership of Mexico’s biggest railroad.
The settlement pushed Kansas City Southern’s stock price higher. Shares advanced 14 percent in heavy trading Tuesday on the New York Stock Exchange, closing at $22.95 a share.
The stock rallied after Kansas City Southern said it had acquired the Mexican government’s 20 percent interest in Grupo TFM. Kansas City Southern took majority ownership of Grupo TFM earlier this year.
In exchange, Kansas City Southern agreed to forgo a tax refund that the company contended it had been entitled to since 1997. That’s when Kansas City Southern invested in TFM along with Grupo TMM, a Mexican transportation company.
Mexican tax courts had estimated that the refund could be valued at as much as $1.1 billion for Kansas City Southern and TMM. TMM, which sold its interest in TFM to Kansas City Southern in April, also was involved in Tuesday’s settlement.
No cash exchanged hands in the settlement, and all legal disputes related to the tax refund will be dropped.
“We are pleased with the settlement announced by the Mexican government today and believe it accomplishes all of the objectives that (Kansas City Southern) had hoped to achieve in this negotiation,” said Michael R. Haverty, the company’s chairman and chief executive, in a written statement. “This settlement brings closure to this dispute. … Now we can move forward with our ongoing capital investments in TFM and focus on providing outstanding rail service along the NAFTA rail corridor.”
According to Mexico’s Finance Ministry, the value of its portion of TFM was 6.2 billion pesos, or about $572 million.
Warren Erdman, Kansas City Southern’s vice president of corporate affairs, said more information regarding the financial aspect of the deal would be provided in an imminent regulatory filing. However, Erdman said, the tax refund essentially paid for the government’s interest in TFM along with the taxes owed to the government in connection with the sale.
“For us, it (the value of the government’s TFM stake) is whatever we think the VAT (value-added tax refund) was worth,” he said.
Analysts applauded the settlement, saying it would allow Kansas City Southern to focus on making TFM more profitable and efficient.
“Another important implication of this deal is that it now makes KCS a viable acquisition candidate with the removal of the Mexican government dispute,” said Rick Paterson, a UBS analyst, in a report Tuesday.
Kansas City Southern is now the sole owner and operator of a 1,300-mile rail network that extends from the Midwest to Mexico City and to key ports on Mexico’s western coast.
Erdman declined to comment on whether the deal would make Kansas City Southern a more attractive property for a bigger railroad.
“We don’t speculate on that kind of thing, other than to say that this settlement is good for our shareholders and our customers,” he said. “It allows us to focus on growing the business of the railroad and not be distracted by litigation.”