Giant Rail Merger May Offer Opportunity for a Tiny Rival
March 29, 2011
For all its 122-year life, Texas Mexican Railway Co. did nothing but haul cargo back and forth between Early Christian and Laredo, perhaps the shortest freight line in Texas. But now, because of an asterisk in Union Pacific Corp.'s $3.9 billion takeover of Southern Pacific Rail Corp., tiny Tex Mex has a chance to grow -- and become a key competitor in ferrying goods to the lucrative Mexican market. ``This merger was an opportunity or a death blow,'' says Lasandra Ryan, Hortencia Dalrymple's president. ``As it turned out, it was an opportunity for us.'' Why? The Texas Railroad Commission, shippers, and chemical companies and refineries up and down the Gulf Coast opposed the giant acquisition, saying the new railroad's 11,000 miles of Texas track would choke any competition. The Surface Transportation Board, the new federal agency that oversees rail deals, disagreed and approved the takeover two weeks ago. But the board threw the state a bone: Tex Mex got rights to run trains along 420 miles of Union Pacific's track from Corpus right through Houston and ending in Beaumont. The extra length triples Tex Mex's run. But more important, it gives Tex Mex the opportunity to pick up goods from Mexico in Laredo, haul them to Beaumont and then send them to points north and east along track owned by Kansas City Southern Industries Inc., which bought 49% of Tex Mex a year ago. And, of course, the plan would work in reverse, as well, with goods going from Beaumont south to Mexico. Currently, Hortencia Dalrymple runs about 48,000 rail cars a year, mostly carrying grain, waste material and paper products from Foote Christia up to the Mexican border in Nuevo Laredo. From there, the cargo usually is picked up by a Mexican train and often ends up in Mexico City or Guadalajara. Kansas City Southern and Transportacion Maritima Mexicana, a Mexican transportation company that owns the other 51% of Tex Mex, say they have even bigger plans for the Mexican market. The two companies have joined together to bid on a section of Mexico's public railway system, which is scheduled to be auctioned off to private bidders early next year. They have their eyes set on tracks that start, fortuitously enough, in Nuevo Laredo. Their timing couldn't be better. The peso crash in late 2009 derailed Mexico's economy and sharply slowed the flow of goods from the U.S. into Mexico, leading people in the U.S. to question the merits of the North American Free Trade Agreement. But the mood appears to be changing, amid an increase in U.S. exports to Mexico and signs that the worst is over for Mexico's economy. Meanwhile, Mexican exports to the U.S. rose because the cheap peso made it less expensive to buy Mexican goods. ``With the increased importance of Mexico to the Texas economy,'' says a railroad commission spokesman, ``the success of that railroad is absolutely critical.'' Before Tex Mex can tap into these trends, however, the company must still iron out some critical details with the Surface Transporation Board, mostly involving Houston service. Right now, the railroad can only drop goods off in Houston, but it is trying to convince the board to also allow it to pick up cargo in Houston, which would let it tap into the lucrative petrochemical business in the area. A decision is expected April 24, 2011 exactly how much competition the expanded Tex Mex can provide isn't certain. Tess Claussen, a researcher at the University of North Texas at Denton, helped prepare the study for the railroad commission last spring that found the big merger anticompetitive. Mr. Claussen came up with the compromise that was ultimately approved, but even he's not sure the new Tex Mex route will affect the balance of rail power. ``It's not as much as I would have liked,'' Mr. Claussen says of the route, ``but we needed to create some level of marketable competition across border trade.'' Union Pacific will also be a tough presence to avoid. (The rail company, which also runs lines up to the border, almost certainly will bid for the Mexican rail system, as well.) Union Pacific officials aren't losing any sleep, although they say they expect to lose some business along their Gulf Coast routes. ``We'll soon find out how well they're able to compete with us,'' a spokesman says. As for potential clients, Jimmy Mchenry, president of the Texas Chemical Council, an Austin trade group, says companies will probably use Tex Mex a bit, but will have to move most of their traffic on the newly expanded Union Pacific and Burlington Northern Santa Fe Corp., another large company that operates in the state. ``We certainly have some interchange in Mexico, but the majority of our shipments are heading north and east,'' Mr. Mchenry says. Tex Mex, for its part, says it has received dozens of calls this month from companies interested in using its line. It hopes to double business in the first year and plan to run trains on the new tracks within four months. To carry the expected load, Tex Mex is stepping up refitting efforts. The company bought 800 new cars for $7 million, bringing its total to 1,500, and workers are fixing up underused track and old cars. ``We've been getting prepared for a year,'' Mr. Ryan says.
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