Kansas City Southern buyout likely would clear Mexican antitrust review, attorneys say
22 September 2020
- Review may require a look at all of investors’ Mexican holdings
- Railroad regulator doesn’t have official say, could suggest conditions
Mexico’s competition regulator, Cofece, is not expected to oppose a potential sale of Kansas City Southern [NYSE:KSU] to financial investors, said three local competition attorneys.
The Wall Street Journal and Inframation News reported earlier this month that Kansas City Southern rejected a USD 20bn takeover offer from Global Infrastructure Partners and a Blackstone Group [NYSE:BX] infrastructure fund, arguing the bid undervalued the company. Given the potential opportunity Kansas City Southern offers investors, buyout interest is unlikely to go away despite the rejection, according to the Infra report.
The Missouri-based railroad group plays a key role in US-Mexico trade and its wholly owned Mexican subsidiary, Kansas City Southern de México (KCSM), hauled 36% of all the country’s rail freight from January to April, according to government statistics.
Through its 50-year concession, which expires in 2047, the Mexican subsidiary of Kansas City Southern operates the shortest, most direct rail passageway between Mexico City and Laredo, Texas, and exclusive access to the US-Mexico border crossing at Nuevo Laredo, Tamaulipas, according to financial filings. It also provides exclusive rail access to the port of Lazaro Cardenas on the Pacific Ocean.
If Kansas City Southern does agree to a buyout deal, Cofece would be the agency responsible for reviewing a takeover of KCSM’s parent company, said Francisco Fuentes, partner at Mexican law firm Mijares, Angoitia, Cortes y Fuentes.
The competition regulator is unlikely to oppose a potential sale of the railroad to financial investors as a deal would help ease Cofece’s concerns regarding Mexico’s railroad market, said another competition attorney and former competition regulator.
In January, Cofece declared a lack of competition in 20 rail-freight routes in the southern Mexican state of Veracruz used to transport chemical products such as chlorine and caustic soda. The move led the country’s Rail Transport Regulatory Agency (ARTF) to impose a cap on ton-per-kilometer fees charged by KCSM and two other railroad operators for those 20 routes.
According to Kansas City Southern, its Mexican subsidiary “is only involved in rendering freight transportation services in limited portions of [seven] routes. During 2018, the company’s revenue associated with these routes represented less than [USD 3m] of revenue”.
In a review, Cofece could ask for a detailed catalogue of all of the buyers’ holdings in Mexico to ensure the deal does not stifle vertical competition, said Fuentes.
The regulator will want to make sure buyout investors will not use Kansas City Southern, for example, to reroute traffic to a grain-storage terminal they might own in Mexico, said the former competition regulator.
Blackstone’s private equity arm does not appear to own any Mexico-based companies, according to Mergermarket data. Blackstone’s portfolio companies likely do business in the country. A Blackstone energy fund backs global energy infrastructure investor Fisterra Energy, which has an office in Mexico City.
If the sale could indeed stifle vertical competition, Cofece could order the buyout investors to divest some of their local holdings, said another competition attorney who is also a former competition official. Collating all of the investment firms’ holdings in Mexico could prove time-consuming and could potentially delay the start of the regulatory review, the attorney added.
The regulator is likely to thoroughly review the local investments of the buyout firms to avoid a repeat of a 2015 case when it approved the sale of a majority stake in local pharmaceuticals distributor Grupo Comercial e Industrial Marzam to Netherlands-based private equity firm Moench Coöperatief, said Ismael Henestrosa, partner at the local law firm Azis & Kaye Business Law.
The leaking of a batch of reports linking 140 public figures to overseas assets in offshore tax havens (Panama Papers) showed that a member of the owning family of one of Marzam’s competitor, Nadro, had financed Moench’s deal. As a result, Cofece ordered Moench to unwind its stake in Marzam.
Cofece now requests detailed documentation on the nature of buyout investors, their resources, limited partners, investments, and what they intend to do with the acquired asset, Henestrosa said.
And yet, it is hard to gauge how long the regulator would take to review a potential sale of Kansas City Southern as it has reviewed few railroad deals, said Fuentes, from Mijares, Angoitia, Cortes y Fuentes.
From 2002 until 2006 (the last year for which data is available), Cofece reviewed five railroad deals. Of those, the fastest examination took only seven days, while the longest took 148 days.
The ARTF, which is part of Mexico’s Communications and Transportation Ministry (SCT), might also look at a potential sale of Kansas City Southern, said Henestrosa. The agency, which was created in 2015, does not have the authority to approve or object to a deal, but could recommend conditions on a deal to guarantee that competitors can freely access Kansas City Southern’s railroads, he added.
Mexico President Andres Manuel Lopez Obrador has gotten involved in some US-Mexico business activity, particularly in natural-gas pipelines, and urged support for state-owned energy firms over private operators.
Last August, Lopez Obrador announced his administration reached a deal with Canada’s TC Energy [NYSE:TRP]; Mexico’s Carso Energy and Fermaca; and Ienova [BMV:IENOVA], the local unit of San Diego-based Sempra Energy [NYSE:SRE], to renegotiate contracts for seven natural-gas pipelines.
The deal will result in savings of up to USD 4.5bn for the Mexican government, Lopez Obrador said at the time.
In June, local daily El Universal, citing a document prepared by ARTF, reported that Lopez Obrador’s administration was planning to take more control over the country’s railroads.
“The current offer of rail service in Mexico is organized with the objective of maximizing profits for the concessionaires, which impose few runs and few itineraries,” noted the document that is still posted on ARTF’s website.
In response to the El Universal report, Lopez Obrador said: “We have never raised [the possibility of taking more control of the railroads]. I have never proposed it, either in government meetings or in public.”
Kansas City Southern, Cofece, SCT and ARTF did not respond to requests for comment.
