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Wednesday, April 8, 2009

Grupo Mexico's Ferromex (bidding on 45 yr freight contract through Santa Teresa), CSX, BNSF, and CARLYLE group
"To stay informed go to WWW.UTU.ORG


(The following opinion article explores the political connections of Union Pacific Railroad and speculates on intentions of Union Pacific to acquire rail routes in Mexico as a prelude to merging with either CSX or Norfolk Southern as well as Canadian Pacific. The article was published Jan. 8 in a transportation law journal.)

Is Union Pacific (UP) in the hunt for Mexico’s largest and most prized railroad -- Kansas City Southern de Mexico (KCSM) --– now leased by Kansas City Southern Railway (KCS)?

What UP possesses to make this a reality -- and which BNSF Railway, also in the hunt, may not possess -- are the political connections in Mexico.

For sure, BNSF has the cash to make an unsolicited bid for stock control of KCS; but BNSF may not have enough political muscle to obtain Mexican government approval for control of KCSM.

It is said that with the right political connections in Mexico, one might achieve most anything. And while UP may be short of cash, it is rich with political connections.

Indeed, all it might take for UP to snatch control of KCSM is an unsolicited bid for KCS by a cash-rich private equity firm friendly to UP -- such as the Carlyle Group; followed by a break-up of KCS, with KCSM being transferred to UP with the help of politicos in Mexico.

So important are those political connections south of the border that even were BNSF to make an unsolicited bid for KCS, the KCSM routes could still be transferred to UP.

You see, it’s highly unlikely the U.S. Justice Department, Federal Trade Commission or even Surface Transportation Board could assert any jurisdiction over UP’s acquisition of a purely Mexican based railroad -- assuming those agencies, given UP’s superior political connections north of the border, would even blink an eye.

KCSM –-- whose 50-year concession KCS acquired from Mexican conglomerate Grupo TMM – is Mexico’s most coveted railroad, running from Mexico City to Laredo and serving vital Mexican ports, including the booming West Coast port of Lazaro Cardenas. 

UP’s acquisition of KCSM is the sort of transaction over which 19th century rail barons Jay Gould and Cornelius Vanderbilt would have salivated.

With U.S. West Coast ports nearing capacity, and Lazaro Cardenas, on Mexico’s west coast, poised to become a major North American  inbound container port, control by UP of KCSM would give UP domination over Asia-Pacific land-bridge traffic destined to teeming Mexico City, Atlanta, Chicago, Dallas, Houston and Kansas City; and set the stage for a merger between UP and either CSX or Norfolk Southern, creating the first Atlantic-to-Pacific transcontinental railroad.

Likely to follow would be a BNSF merger with the remaining East Coast railroad, creating a transcontinental rail duopoly in the United States.


And before you predict a transcontinental rail marriage would not gain regulatory approval, recognize that the U.S. Surface Transportation Board is the sole arbiter of domestic rail mergers, and the STB and its predecessor Interstate Commerce Commission have been facilitators of numerous other major rail mergers, including the 1996 UP-Southern Pacific merger that was strongly opposed by the Justice Department and other federal agencies.

For UP, the grab of KCSM would be equivalent to a month of Sundays.

Is this merely pie in the sky? Well, let’s look at the players -- all UP friends, who comprise a tangled web of well-connected rain makers and politicos.

Begin with UP and its Washington, D.C. law firm, Covington & Burling.

Add to the mix the Carlyle Group, a privately held $19 billion international investment firm with close ties to Bush presidents 41 (a former Carlyle adviser) and 43, as reported by Britain’s Guardian newspaper and U.S. investigative reporter Jerome Corsi.

Stir in other political allies of the Bush family, as well as Mexican politicos, and the tangled web takes on the look of carefully connected dots.

Recall that Covington & Burling, in September 2003, hired Linda Morgan, former chairman of the Surface Transportation Board, who supported UP’s 1996 merger with Southern Pacific, and who indicated to the Washington Post in 1997 that she favored a railroad duopoly in the U.S.

Morgan went to Covington & Burling after Covington partner Mike Hemmer, who headed Covington’s transportation practices group, departed in 2002 to become UP’s chief legal officer.

Morgan also sits on Canadian Pacific’s board of directors, suggesting rather than a U.S. transcontinental rail dupoly, a North American transcontinental rail duopoly is on the horizon.

Focus now on the Carlyle Group. Recall that in 2002, it purchased the International CSX Lines Division for $300 million, then unsuccessfully sought -- in a plan backed by the Bush administration -- to sell its port-terminal operations to a Middle East government-owned entity for some $1.2 billion.

Among the Carlyle Group’s U.S. principals are Richard Darman, the first president Bush’s budget director, and Jim Baker, the first president Bush’s secretary of state and a partner in the Baker Botts law firm that has a long-history of acquisition projects in Mexico.

In November 2006, UP created a new board seat for Thomas "Mack" McLarty, president of Kissenger McLarty & Associates (we’ll get to them) and a senior adviser to the Carlyle Group. Previously, McLarty was President Clinton’s chief of staff and later Clinton’s special envoy to Latin America

And just four months before McLarty  went to the UP board, Andy Card, with ties to Carlyle Group principals, was elected to the UP board. Card was the first president Bush’s transportation secretary -- a job he acquired with assistance from former UP chairman Drew Lewis, also a former transportation secretary -- and was the second President Bush’s first chief-of-staff.

Also, let’s not forget that Vice President Dick Cheney is a former UP board member.

Moreover, the Carlyle Group is no stranger to KCSM. In 2003, the Carlyle Group itself unsuccessfully sought to acquire a 51 percent interest in KCSM (then known as TFM). KCS won the bidding war. In fact, Carlyle even inspected the lines of KCSM as part of what was termed, "due diligence."

There’s more.


Back in October 2003 --  just weeks after Morgan went from the STB to Covington & Burling --  Kissinger McLarty & Associates entered a global strategic alliance with Covington & Burling. The Kissinger is Henry, the former Nixon administration globe-trotting secretary of state.

This was about the time that Kissinger McLarty & Associates -- specifically, Mack McLarty -- was advising BNSF on strategic transportation issues in Mexico. Apparently, McLarty jumped ship to UP, leaving, according to a source, BNSF Chairman Matt Rose in a snit.

Now comes the Nov. 21 appointment of Luis Tellez, former head of the Carlyle Group’s Mexico operation, as Mexico’s secretary of transportation, with regulatory oversight of Mexican rail operations. Tellez is a former chief of staff to Mexican President (1994-2000) Ernesto Zedillo, who previously served on UP’s board of directors.

As for Tellez, he previously was on the board of directors of Grupo Mexico, which controls a smaller Mexican railroad, FerroMex, that just happens to be 27 percent owned by UP. Interestingly, Tellez joined the Carlyle Group in Mexico as an adviser just prior to Carlyle’s unsuccessful 2003 attempt to acquire control of KCSM.


Here is why KCSM is so coveted a prize:

*  KCSM controls all tracks into and out of the Port of Lazaro Cardenas.

*  The Port Lazaro Cardenas is blessed with a deepwater channel sufficient to handle the largest of container ships;

*  KCSM already has acquired land adjacent to the port under a zero-price, long-term agreement;

*  Port operator Hutchinson Wampoa is investing in a 10-fold port-capacity expansion;

*  Wal-Mart, whose second biggest market is Mexico, has it’s eyes on Lazara Cardenas as a crucial North American port of entry.

*  Analysts at UBS project KCSM revenue from Lazaro Cardenas rail traffic will soar from some $30 million in 2007 to almost $100 million by 2015, and $255 million by 2025;

*  In terms of lifts, UBS projects an almost two-million 20-foot equivalent container throughput by 2025, compared with some nine million currently at Long Beach/Los Angeles, 1.8 million at Seattle, and some 1.5 million at Oakland. The U.S. West Coast ports, meanwhile, already are operating at near capacity with little room for expansion;

*  The rail route from Lazaro Cardenas to Chicago or Kansas City is roughly equivalent in length to the rail routes from congested Long Beach; is 600 miles shorter to Houston and closer to Atlanta. The port also is the closest to the population-dense Mexico City;

*  CP Ships, NYK Lines, Maersk and APL already serve the port; and,

*  Lazaro Cardenas enjoys a substantial labor-cost advantage -- its per-lift costs being some 30 percent cheaper than at U.S. West Coast ports.

Indeed, KCSM, with its sole rail access to the Port of Lazaro Cardenas, is a modern-day Hope diamond; but prying it loose from KCS may be equivalent to freeing Excalibur. And that is why UP’s superior political connections are essential

BNSF remains interested; but UP, while not awash in cash as is BNSF, has something more valuable --  its new-found cash-rich Carlyle Group and Carlyle’s similarly extraordinary political connections. No wonder BNSF’s Matt Rose is so irritated.

Who said railroads had become a mature and financially boring industry?

(The preceding opinion article was published in Association Highlights, a publication of the Association of Transportation Law Professionals. The article does not necessarily express the opinion of the association.)"


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