Mexican President Andres Manuel Lopez Obrador seized part of a rail line owned by billionaire German Larrea’s Grupo Mexico SAB, raising questions about how the move might impact a bid by the mining magnate to buy Citigroup Inc.’s retail bank in the country.
A section of track in the state of Veracruz was deemed “of public utility” and transferred to a government entity that’s building a line across the Isthmus of Tehuantepec, a relatively narrow strip of land that separates the Pacific Ocean and Gulf of Mexico. The rail line will eventually be operated by the Navy, according to a notice posted in the daily gazette on Friday.
The expropriation was a shock to the business community and seemed to contradict Lopez Obrador’s campaign promise to investors that his government wouldn’t take private property. While Friday’s notice said the rail line’s owners would be compensated, no details were given.
The move threatens to upend Grupo Mexico’s talks with Citigroup to purchase the retail operations of Banamex, a transaction that was of particular interest to AMLO because of the lender’s economic importance and symbolic value as one of the country’s oldest banks.
“It’s not exactly inviting for the government to seize a railroad,” said Roger Horn, a senior strategist at SMBC Nikko Securities America in New York. “This is bizarre even for this administration, where AMLO has for the most part negotiated with the private sector to achieve his policy goals.”
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GMexico Transportes SAB, which runs Ferrosur SA, the owner of the seized rail line, said armed Navy personnel occupied company facilities on the Coatzacoalcos-Medias Aguas stretch of track beginning at 6 a.m. on Friday. The company is analyzing the “surprising and unusual takeover” it said in a statement.
Shares of GMexico Transportes fell 4.1% in Mexico City to the lowest since January. Grupo Mexico extended early losses to slump 4.5%. Inbursa, the Mexican bank owned by billionaire Carlos Slim, has a 17% stake in GMexico Transportes.
The decree affects 120 kilometers (75 miles) of Ferrosur’s 1,500-kilometer rail line concession. The government has said it plans to build and operate a railroad to connect ports on the Gulf of Mexico with ports on the Pacific in a bid to bolster trade. It’s designed to carry both people and cargo, and will come with 10 industrial parks along the route.
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Larrea had met twice with Lopez Obrador this week, first at a meal with other top business executives on May 16 and again in private the next day, local media reported.
According to a report by local business columnist Dario Celis, AMLO had asked Larrea to cede the stretch of railroad that the Navy said was the fastest way to build the Isthmus train, but the mining magnate had declined, instead offering to build a parallel route. The president said no, according to Celis.
“This sets a negative precedent for investments in Mexico, specifically in regulated sectors,” said Rodolfo Ramos, a strategist at Bradesco BBI.
--With assistance from Leda Alvim.
(Updates with share price move, adds background.)