MEXICO CITY — Mexican authorities are set to vote Thursday on a proposed railroad merger that would unite the country’s second- and third-largest railways into one company with nationwide reach, according to the New York Times.
Under the plan, the northwest line, Ferrocarril Mexicano, or Ferromex, would absorb the southern line, Ferrocarril del Sureste, known as Ferrosur.
The staunchest opponent of the deal is the No. 1 railroad, Transportación Ferroviaria Mexicana, or TFM, which two years ago itself tried to buy Ferrosur but was denied permission by the government on antitrust grounds.
There is a good chance that regulators will also reject the current proposal. But this time the implications for the suitor seem much greater.
In fact, some analysts say that this merger is not really about control of the nation’s railroads, but is about keeping the company that controls Ferromex, Grupo México, solvent.
The three railroads were created in steps after the national rail system was privatized in 1996. Ferrosur is owned by Latin America’s wealthiest man, Carlos Slim, and TFM is controlled by José Serrano, an ocean-shipping magnate.
TFM, the profitable northeastern line that connects Mexico’s industrial heartland to Chicago and the Eastern Seaboard, argues against the proposed merger by saying that it would, among other things, cut off access to TFM’s southern clients, which now represent 10 percent of its business. It would effectively undo the rules of competition under which the current rail system was set up, said Mario Mohar, chief executive of TFM, and “one can’t change the rules in the middle of the game.”
But Ferromex says that Ferrosur, the only one of the three railroads not connected directly with the United States market, is unfairly isolated in the nation’s undeveloped and impoverished south, where it cannot compete with the likes of TFM.
“We believe the merger will respect the spirit of privatization and generate competition” in the presence of “an actor that is much too strong in the north,” said Juan Rebolledo, vice president for public affairs at Grupo México, which owns 76 percent of Ferromex.
Grupo México is primarily a mining company and is owned by the Larrea family. The Larreas have had a close relationship with the government since the 1990’s, when Mexico reprivatized a series of mines that had been owned by Americans before they were nationalized. The Larreas bought mines cheaply, using the revenues to make their next big purchase during another round of government privatizations. This time they bought their railway, Ferromex, for $550 million, in 1996.
In 1999, when copper prices were high, the Larreas capped their spending spree with the $1.1 billion purchase of Asarco, then America’s largest copper company, whose Mexican mines were expropriated by the government some 30 years earlier.
Within just a few years, the Larreas went from owning a small mining concern to owning Mexico’s largest railway and owning the world’s third-largest copper company, mining the Americas from Seattle to Peru.
But soon the family’s fortunes fell with the price of copper, which hit historic lows in 2000. Now Grupo México is $2.7 billion in debt, in part, too, because of its acquisition of Asarco, which is having its own financial troubles. And Grupo México is facing a $450 million debt payment in November.
The easiest solution for Grupo México, many analysts say, is to use cash from its rail operation to pay its mining debt. But not even its lucrative and almost debt-free railroad can support such a payment. The proposed merger would create a virtual monopoly over the nation’s rail system, these analysts say, enabling Grupo México to raise tariffs and pay off debt while waiting for the world’s stubborn copper prices to rise.
“The railroad is a logical source of funds to recapitalize Grupo México’s mining subsidiaries, seeing that it is profitable, valuable and underleveraged,” said Aaron Holsberg, an analyst at J. P. Morgan in New York.
But analysts also say that time is running out for Grupo México, which is under pressure from its creditors to renegotiate its debt. When the Larreas bought Asarco, they borrowed $1 billion from a conglomerate of banks. Analysts say that these creditors, which are not eager to set off Mexico’s complex and ambiguous bankruptcy-court proceedings, will probably be willing to extend Grupo México’s debt, particularly if the company puts up part of its railroad as collateral.
Grupo México does not want to do this, even though its debts continue to grow into what some analysts say looks like a possible precursor to bankruptcy. Instead, it says, it will announce next week a debt restructuring plan that will involve cash. The company did not provide details.
Such a restructuring would allow Grupo México to postpone what some analysts had thought might have been inevitable: the sale of a larger stake of Ferromex to its partner, the Omaha-based Union Pacific.
The American giant, with an 80 percent market share of all rail traffic between Mexico and the United States, has long seemed hungry for more. Even during the privatization, Union Pacific made it clear that its long-term focus was to extend into Mexico.