Florida East Coast Railway to be acquired by Grupo Mexico

A big railroad deal is coming down the tracks, but E. Hunter Harrison, railroad legend and the new top executive at Class I railroad carrier CSX is not involved. In fact, the deal does not include a Class I carrier, but it does involve another Jacksonville, Florida-based raillroad.

Earlier today, the Florida East Coast Railway (FEC) and GMéxico Transportes S.A. de C.V.(GMXT), the transportation unit of Mexico City, Mexico-based miner Grupo Mexico, announced that they have entered into an agreement in which GMXT will acquire FEC in an all-cash transaction, which is expected to close subject to satisfaction of closing conditions.

Various reports said the sale price was $2.1 billion, with Reuters reporting that Grupo Mexico financed the purchase from FEC owner Fortress Investment Group with $1.75 billion in debt and $350 million in capital, based on a company statement for the Mexican stock exchange.

GMXT is comprised of 10,570 kilometres, or 620 miles, of railroads across 24 states in Mexico, as well as Texas. It connects with 5 points on the U.S. border and 8 port terminals. The railway had $1.76 billion in 2016 sales, moving 54.44 billion ton-km, and hauled 1.2 million cars. It has 66 percent and 51 percent market share, respectively, in the automotive and international segments. The four subsidiaries of GMXT are Ferromex, Ferrosur, Intermodal Mexico, and Texas Pacifico, and it hauls freight for various sectors, including: farming, automotive, cement, energy, intermodal, metals and minerals, industrial products, and chemicals and fertilizers.

The statement to the Mexican stock exchange cited in the Reuters report by Grupo Mexico said that it viewed FEC as a “unique and irreplacable asset with 565 miles of track that offers rail services along Florida’a east coast.”

FEC provides rail service along the east coast of Florida and is the exclusive provider of rail service to South Florida’s ports—Port Miami, Port Everglades, and the Port of Palm Beach, accoridng to a statement on the company’s Web site..  FEC provides service across 351 miles of owned track and with connections to CSX and Norfolk Southern in Jacksonville, Florida, FEC is able to serve 70 percent of the United States population in 1 to 4 days. FEC serves a diverse mix of intermodal, aggregate, auto, chemicals, metals and lumber customers, handling approximately 550,000 loads per year.

“The acquisition of FEC is an important strategic addition to our North American transportation service offering,” said Alfredo Casar, President and Chief Executive Officer of GMXT. “Our acquisition of the FEC will significantly enhance the scope, scale and diversification of our service. We are excited to welcome FEC to our transportation team as we work together to provide safe, reliable and efficient rail and trucking services to our customers.”

Tony Hatch, principal of New York-based ABH Consulting commented in a research note that rail observers had thought that an infrastructure fund or a US short line holding company might acquire FEC, “but Grupo-M shocked the rail world and bucked the trend and invested Mexican wealth into the US (or parked their cash on this side of the coming Wall?).”

And he added that FEC President and CEO Jim Hertwig has consistently highlighted how a good ROIC (return on invested capital) can be generated on an intermodal business with a length of haul well below 400 miles.

John Larkin, Managing Director - Transportation and Logistics at Stifel Equity Research, said that with the Mexican peso so depressed relative to the US dollar, he was also surprised to see a Mexican bidder emerge the winner. 

“I would have expected GWR, Watco, or another large scale short line/regional railroad operator buy the property,” he told LM.  “Although, I just heard that Grupo Mexico bought another rail property in Texas not too long ago.  But the synergies aren't obvious.  It appears to be the purchase of a unique asset, where a lot of the growth opportunity has already been harvested by Jim Hertwig's team.”

Going forward, Larkin said there are a few questions.

One being if Hertwig stays or retires, with the analyst explaining that Hertwig did a spectacular job increasing the profitability of the FECR during his tenure.  “He is the rare railroad operator who can increase operational efficiency while simultaneously courting incremental shippers,” noted Larkin.

Another question raised by Larkin is if FEC keeps Raven Transport, a Jacksonville-based truckload carrier, or sell it off, adding that Raven CEO Steve Silverman has done a terrific job feeding more traffic from the southeast region into Jacksonville for further transport south on the FECR.  

Larkin also raised the point of whether the Surface Transportation Board will have any issues with a foreign buyer of a US railroad, especially one that is partially owned by the Union Pacific.  

“When will the Trump Administration have a fully seated STB such that a deal like this can be evaluated by the full Board?” Larkin questioned.  “Or will the Democrats continue to drag their feet on all of Trump's appointees?  The Board needs two more Republicans to be fully rounded out to the newly mandated number of five members (up from three).”