UTU: News Page 1 of 8

Just what are UP's intentions?

(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

http://www.utu.org/worksite/print_news.cfm?ArticleID=32676 1/26/2007
UTU: News Page 2 of 8

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.

http://www.utu.org/worksite/print_news.cfm?ArticleID=32676 1/26/2007
UTU: News Page 3 of 8

A WHO’S WHO OF POLITICAL CONNECTIONS

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,

http://www.utu.org/worksite/print_news.cfm?ArticleID=32676 1/26/2007
UTU: News Page 4 of 8

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

http://www.utu.org/worksite/print_news.cfm?ArticleID=32676 1/26/2007
UTU: News Page 5 of 8

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.

THE MEXICAN POLITICOS

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

http://www.utu.org/worksite/print_news.cfm?ArticleID=32676 1/26/2007
UTU: News Page 6 of 8

(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.

KCSM AND LAZARO CARDENAS

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;

http://www.utu.org/worksite/print_news.cfm?ArticleID=32676 1/26/2007
UTU: News Page 7 of 8

* 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?

http://www.utu.org/worksite/print_news.cfm?ArticleID=32676 1/26/2007
UTU: News Page 8 of 8

(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.)
January 9, 2007

http://www.utu.org/worksite/print_news.cfm?ArticleID=32676 1/26/2007