Mexico Will Sell 3 Big Steel Firms for $885 Million : * Manufacturing: The sales will mark the end of a costly government effort to compete with private enterprise.

In what is expected to be Mexico’s last major divestiture, the government Friday agreed to sell for $885 million in cash and debt three companies that produce more than half the nation’s steel.

As part of the sales agreements, investors pledged to invest $585 million in upgrading two of the companies, including installation of anti-pollution equipment.

The sales will mark the end of a dramatic--but costly--government effort to compete with private enterprise in basic industry.

The huge Sicartsa rolled steel mills built in 1977 in the Pacific port of Las Truchas and the furnaces that make flat steel in the border state of Coahuila were powerful symbols of the government-driven economic model that Mexico followed until six years ago, when it switched to a free-market system in the wake of the Third World debt crisis.

Government officials have contended that they never hoped to recover the billions of dollars invested in the companies over the past decades. Instead, their goals were to relieve the government of the continued need to subsidize the money-losing companies and to find buyers who would provide the $800 million in financing that they estimated the mills will require to meet stricter environmental standards and to compete in a glutted world market.

“In the case of Sicartsa, despite international excess capacity and drastic reductions in steel prices, the price per ton of installed capacity was equivalent to that paid for other steel divestitures, such as British Steel,” said Aaron Tornell, the Treasury Department official in charge of the sales.

Sicartsa fetched the top cash price--$170 million offered by the Villacero Group for 80% of the company’s shares. The government will remain a minority stockholder.

Grupo Acero del Norte paid $145 million in cash and assumed $350 million in debt to obtain the largest and most troubled of the companies, flat steel maker Altos Hornos, known by the initials AHMSA. Acero del Norte promised to invest $535 million over an unspecified period.

The smallest company, Balsa Steel, was purchased by the Caribbean Ispat Group for $25 million in cash and a $195-million debt swap. The investors also agreed to make $50 million in improvements.

The biggest surprise was that Mexico’s top private steel company, Monterrey-based Grupo Industrial Alfa--which had bid on all three companies--did not win a single one. Alfa had said that taking on debt to buy the government-owned mills would cripple its efforts to finance renovations of its own mills.

Another well-known steel producer, Industrias de Monterrey, did not bid after attempts to find a foreign partner failed.

Selling the companies was a fitting final stage for a privatization drive that has reduced the number of government-owned companies to 252 from 412 when President Carlos Salinas de Gortari took office in December, 1988.

Sales of a few dozen additional small companies, including nine of the 18 commercial banks that have not been sold, are expected to be completed early next year.

The remaining companies--including the government oil monopoly, the electric company and the Mexico City subway--are not for sale, officials have said.