The content has been shared, if you want to share this content with other users click here.
Valued at US$2.1bn, the acquisition of the Florida East Coast (FEC) Railway by Grupo México Transportes' (GMXT) rail subsidiary Ferromex, closing in late March, was the largest Mexico-related M&A deal in the first quarter, as the Mexican group moved to forge major inroads in the US market.
The buyout of FEC Railway, which ships roughly 550,000 containers per year, means the new owner will have access to 70% of the US territory with intra-US shipping time of one to four days.
"The acquisition of FEC is an important strategic addition for GMXT with its offering of transport services in North America," read a statement from Grupo México Transportes in a securities filing. "This transaction marks an important expansion of the reach, scale and diversification of our services."
GMXT, in a separate report, described Florida as the "primary gateway to Latin America and the Caribbean through eastern sea coast," with a GDP equivalent to the combined economies of Colombia, Peru and Chile. The document also noted the "expansion of the Panama Canal will consolidate Florida as a key gateway to North America."
The deal comes after Fortress Investment Group picked up FEC Industries for US$3.5bn in 2007. At the time, rail services comprised about 60%, or US$460mn, of operating revenues – translating into a valuation of the rail business at around the same purchase price given to Ferromex.
After falling to US$200mn by 2011, FEC revenue recovered to US$404mn by 2016. Nevertheless, by making the deal, GMTX seemed willing to pay a higher premium for the strategic benefits over outright valuation.
The move might appear odd given the uncertain outlook for US-Mexico trade relations; however, business leaders on both side of the border have stepped up pressure on US President Donald Trump to maintain vital cross-border supply chains.
In a April 24 speech in Mexico City, the head of the largest US business lobby Thomas Donohue offered assurances that "constructive," behind-the-scenes efforts were being carried out with the Trump administration to have a pro-business deal ready roughly by mid-2018.
The transaction also comes at a critical juncture at home. Mexico's competition watchdog Cofece is set to issue a final ruling in July to boost competition and address the ability of railways to fix freight rates, potentially hurting clients. More than 72% of Mexican railways are controlled by Ferromex, sister company Ferrosur and Kansas City Southern.
At the same time, Ferromex and Ferrosur are pumping US$80mn into acquiring a fleet of double- and triple-tiered cargo containers aimed at auto transport, as well as investing US$250mn this year to maintain and rehabilitate tracks, bridges and tunnels.
In the end, the motive seems more closely tied to FEC's exclusive access to the Port of Palm Beach, Port of Miami (pictured) and Port of Everglades, with roughly two-thirds of the company's revenues stemming from the intermodal segment. The key entry points, linked to the US East Coast rail infrastructure with connections to CSX and Norfolk Southern lines, suggest a significant boon to Ferromex's intermodal business.
A theory posited by James Sands of Seeking Alpha suggests as much. "Adding around US$250 million or so of freight revenue to Grupo Mexico would add around 14% more revenue. But for the intermodal segment, it would potentially more than double the business," he said.
"Grupo Mexico's intermodal capacity growth has been constrained in Mexico. Making a move outside of the country was not only logical but necessary to expand intermodal offerings," he added.
BBVA Bancomer handled the financial advisory role for GMXT, while Barclays Bank and Morgan Stanley (Global) handled financials for FEC Railway, according to details provided to BNamericas by Transactional Track Record (TTR).
TTR also noted that Mexico's Galicia Abogados and US firm Dechert, served as legal counsel for Grupo México; and US firms Sidley Austin US and Cravath, Swaine & Moore carried out legal services for FEC.