CSX Surges as Activists Said to Target Railroad for Overhaul

By Frederic Tomesco; Scott Deveau; Thomas Black | Charleston Gazette Mail, January 20, 2017 | Go to article overview

CSX Surges as Activists Said to Target Railroad for Overhaul


Frederic Tomesco; Scott Deveau; Thomas Black, Charleston Gazette Mail


CSX jumped the most on record after news that outgoing Canadian Pacific Railway Chief Executive Officer Hunter Harrison is teaming up with an activist investor to shake up the least efficient U.S. railroad. Paul Hilal, who worked for years with billionaire hedge fund manager Bill Ackman, is looking to install Harrison in a leadership position at CSX, according to people familiar with the matter. Harrison announced his retirement ahead of schedule Wednesday from Canadian Pacific, where he partnered with Ackman in an effort to combine with CSX and its eastern U.S. competitor, Norfolk Southern Corp.

A Harrison-Hilal campaign would create another industry boardroom drama less than a year after Harrison and Ackman abandoned their attempts to take over Norfolk Southern. Harrison made Canadian Pacific into one of the industry's best performers after taking over as CEO in 2012 and previously solidified Canadian National Railway Co.'s status as the leanest North American railroad before retiring in 2009. That followed an overhaul of Illinois Central.

"Hunter Harrison improves margins, and eastern rails CSX and NSC still have the weakest margins in the industry, Bascome Majors, an analyst at Susquehanna Financial Group, said in a note to clients.

CSX declined to comment. The shares surged 18 percent to $43.60 at 11:46 a.m. in New York after earlier rising as much as 19 percent for a record intraday gain. Other carriers also rose, with Norfolk Southern advancing 4.1 percent and Canadian Pacific climbing 4.6 percent.

Hilal's Mantle Ridge fund already holds a stake in CSX, said the people, who asked not to be identified because details are private. Hilal recently started the fund after years at Ackman's Pershing Square Capital Management. Ackman isn't involved in the CSX planning and merging the railroad with Canadian Pacific isn't part of the goal, the people said. Hilal served on the Canadian Pacific board for almost four years until early last year.

While investors have praised the current CSX management team, they have "tremendous respect for Hunter Harrison's unparalleled track record at Canadian Pacific and Canadian National, as well as an earlier stint at Illinois Central. CSX's Mike Ward committed to stay on as CEO for three more years after his heir apparent, Oscar Munoz, abruptly left the railroad in September 2015 to lead United Continental Holdings Inc.

Potentially, there's a two-to-four-year "window for an outside CEO to run CSX while the rest of the C-Suite becomes more seasoned for the role, Majors said.

Harrison, 72, stepped down from Canadian Pacific on Wednesday, months ahead of schedule, forfeiting $89 million in awards and benefits. A separation agreement gives him a "limited waiver of his non-competition obligations, the company said Wednesday.

"His reputation of being the most sought-after manager in the North American railroad industry could make it very difficult for CSX to refute Harrison's desire to run its franchise, Jason Seidl, an analyst at Cowen & Co. …

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