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Subway Snafu Irking Commuters Sinks ICA Shares: Corporate Mexico

A service halt on a new $2 billion subway line built in partnership with billionaire Carlos Slim is making Empresas ICA SAB (ICA*) Mexico’s worst performing stock.

ICA shares slumped 15 percent last week as Mexico City officials closed more than half the stations on the capital’s Golden Line after deciding that twisted rails and damaged ties were endangering passengers. Last week’s decline, the biggest among members of Mexico’s IPC index, pushed the Mexico City-based builder to its lowest price since June 2012.

The subway case is unfolding as ICA hustles to win new contracts following a 22 percent sales decline last year, when Moody’s Investors Service and Standard & Poor’s lowered the company’s credit rating as Mexican construction activity weakened. The Golden Line, which opened in October 2012 and is the newest part of Mexico City’s subway system, was built by an ICA-led group that included a unit of Slim-controlled Grupo Carso SAB. (GCARSOA1)

“Mexico City is one of the most important clients that the company could have, so any bad relationship could certainly hamper its ability to gain further projects in the area,” Javier Gayol, a Corporativo GBM SAB analyst who recommends selling ICA shares, said in a telephone interview from Mexico City. “There’s a lot of bad news around this.”

For Cristina Malvaez, the service suspension that may last months means five hours less with her family each week. Instead of boarding a train at the elevated Calle 11 stop, Malvaez, 56, now waits outside the station’s shuttered doors to ride one of the aged, pea-green and orange-striped buses that pass every few minutes.

“The closing has added about an hour to my daily commute,” she said. “The inauguration of this line was so hurried that it was done poorly. Now we are all paying for it.”

Finger Pointing

ICA shares have lost 25 percent this year, the second-biggest decline among the IPC’s 35 members. The index is down 11 percent. ICA’s Mexican stock has 10 buys, four holds and three sells, according to analyst recommendations tracked by Bloomberg. Carso fell 3.8 percent last week and 9.2 percent this year.

ICA Chief Executive Officer Alonso Quintana said the Golden Line’s rails were incompatible with trains provided by Spain’s Construcciones y Auxiliar de Ferrocarriles SA, or CAF. ICA, which has had a hand in building all 12 lines of Mexico City’s Metro, as the subway system is known, is confident it won’t face liability or a tarnished reputation after investigators determine what went wrong, he said.

“They’re bringing in specialists who will certify who is responsible for these issues,” Quintana said in a telephone interview last week. “We’re confident that we’ll see it has nothing to do with how we built the lines.”

‘Perfect Condition’

CAF didn’t participate in the design or construction of the subway line and built the trains according to the specifications requested by the Metro, Maximiliano Zurita, head of CAF’s Mexico unit, said in an e-mailed response to questions.

The 30 trains provided by CAF for the Golden Line, also known as Line 12, are in working order and have been regularly tested, he said. “I can assure you with conviction that the trains operate in perfect condition,” Zurita said.

Local lawmakers from the National Action Party, or PAN, place the blame on former Mexico City Mayor Marcelo Ebrard, claiming he rushed the inauguration of the Golden Line prior to leaving office in December 2012.

Assure Safety

Ebrard, from the Democratic Revolution Party, told reporters last week he was “tranquil and proud” about Line 12, adding that the project was supervised by city officials, the federal government and lawmakers. He also used his Facebook page to publish an October 2012 report from a German engineering group certifying that Line 12 was operating correctly. The former mayor couldn’t be reached for additional comment. Phone calls and messages to his press representatives weren’t immediately returned.

Jorge Serrano, an investor relations executive, didn’t return an e-mailed message seeking comment yesterday, which was a holiday in Mexico. Carso executives weren’t in the office, according to a person answering the main telephone number. A Carso investor relations executive couldn’t be reached.

The line was partially closed to assure passenger safety and authorities must not be “overconfident or complacent” when dealing with a potential risk, subway system head Joel Ortega said in a statement last week. The Metro referred requests for additional comment to the city’s transportation department, which didn’t return calls.

ICA Contract

ICA is still in negotiations with the Mexico City government for an additional $200 million it says it’s owed for work on Line 12, Quintana said March 15. The company is confident that the partial closing of the Golden Line won’t affect those talks, he said.

If ICA is ruled to be at fault for the Golden Line, any fine could be deducted from those outstanding payments, which may be as high as 4 billion pesos ($304 million), Ana Hernandez, an Invex Casa de Bolsa analyst who recommends buying the builder’s shares, said by phone from Mexico City.

“ICA is one of the most important construction companies in Latin America and definitely in Mexico,” said Luis Maizel, who manages about $5.5 billion of fixed-income securities as president of San Diego-based LM Capital Group LLC. “Obviously this situation doesn’t help the company, but I think that very soon this will become an attractive buy for investors.”

The builder may benefit from recently approved constitutional changes to bolster private-sector investment in the energy industry, Maizel said. Yields on its bonds maturing in 2017 have fallen 75 basis points, or 0.75 percentage point, this year to 7.93 percent.

Fare Increase

“The bonds are holding up really well,” Carlos Legaspy, who oversees about $350 million in emerging-market debt, including ICA bonds, at InSight Securities Inc., said by phone. “Where else can I find a 2017 maturity at these yields?”

The Golden Line carried about 92 million passengers last year, according to the Metro system’s website. There were more than 1.68 billion passenger rides on Mexico City subway trains in 2013. The city raised fares to 5 pesos from 3 pesos in December, inciting protests at several stations.

“Prices were raised 2 pesos so we could get service like this?” said Jose Luis Rodriguez, as he stepped off a crowded bus at the closed Calle 11 train station on March 14. “Opening this train line has now just made things worse.”

To contact the reporters on this story: Adam Williams in Mexico City at awilliams111@bloomberg.net; Brendan Case in Mexico City at bcase4@bloomberg.net

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net; Ed Dufner at edufner@bloomberg.net Robin Saponar

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