KCS Sees Clear Tracks

KCS Sees Clear Tracks

Copyright 2004, Traffic World, Inc.

A larger stake in a North American cross-border rail system is still within Kansas City Southern''s grasp.

The railroad''s plan to create a company called NAFTA Rail by acquiring a controlling interest in its partnership with Mexican railroad Grupo TFM got a boost March 19 when an arbitrator said its contract with Grupo TMM, the Mexican carrier''s parent company, remained in force. Grupo TMM had canceled an agreement struck in April 2003 with KCS after Grupo TMM shareholders voted against the deal four months later.

KCS sees the decision as clearing the way for the cash and stock transaction, valued at over $400 million, to go forward in the next several months. The new railroad, which would stretch from Mexico City to Kansas City - and through existing connections with Canadian National Railway to Canada - would result in more formidable competition for cross-border freight with trucks and other rail carriers.

"We view this as a major victory for KCS," said KCS Vice President of Corporate Affairs Warren Erdman. "The (arbitrator''s) decision was an affirmation of the duties of the participants under the agreement. Clearly we''ve won the first round."

The next round, Erdman said, is for the arbitration panel to decide remedies and damages due KCS. "We''re going to ask for specific performance, that the actions of (Grupo TMM chairman and CEO Jose Serrano) had led the two parties to negotiate in good faith and therefore (Grupo TMM) must perform on the contract."

Grupo TMM''s take on the meaning of the decision was slightly different. The company acknowledged the panel''s finding that the rejection of the deal by their shareholders didn''t terminate the agreement. However, "in reaching the conclusion, the panel found it unnecessary to determine whether approval by Grupo TMM''s shareholders is a ''condition'' of the agreement," Grupo TMM said, and thus insisted shareholder approval is still required to allow the deal to go forward.

What caused the deal to unravel last summer is still open to speculation.

Some industry observers believe a tempestuous relationship between Serrano and KCS Chairman, President and CEO Michael Haverty doomed the deal from the start. In addition, a favorable resolution of a dispute between the Mexican government and TMM over a Value Added Tax refund worth $950 million also may have been a factor in killing the deal, according to industry sources.

The agreement would give KCS, which already owns 37.3 percent of TFM, an additional 38.8 percent of TFM shares for 18 million shares of NAFTA Rail, $200 million cash and a potential incentive payment of between $100 million and $180 million based on the resolution of certain tax contingencies. KCS also will by from TFM a 51 percent controlling interest in Mex Rail, the holding company that owns the Texas-Mexican Railway (Tex Mex), for $32 million. Tex-Mex is a shortline connecting the two rail systems on the U.S.-Mexican border at Laredo, Texas.

It was estimated last year that the new 6,000-mile railroad would yield roughly $1.3 billion in annual revenue on roughly 3 million carloads.