CSX CSX Corporation

By Paul Ziobro 

Railroad veteran Hunter Harrison tried twice to take over rival CSX Corp. and failed. But investors cheered Thursday the idea of letting him run the company himself.

Mr. Harrison on Wednesday quit his post as CEO of Canadian Pacific Railway Ltd. and walked away from an exit package worth $89 million so he would be free to join a rival. He is teaming up with an activist investor to press CSX's board to hire him to a senior leadership job, people familiar with the matter said.

Shares of CSX surged to all-time highs Thursday morning on the news. The stock recently added $6.43, or 17%, to $43.31, giving CSX a market value of nearly $40 billion.

Unlike his unsuccessful merger attempts, Mr. Harrison may find a more receptive ear at CSX if his plan is to work at the company, investors and analysts say. Such a move wouldn't raise the antitrust concerns of a takeover. Plus, CSX has a chief executive near retirement age. CSX has declined to comment.

One institutional investor said CSX shareholders would welcome Mr. Harrison as its next chief executive given his record. At Canadian Pacific, "he took the worst performing railroad...and turned it around in a relatively short period of time," this investor said.

One problem? Mr. Harrison is 72 years old, or seven years older than CSX's current chief, Michael Ward. "You generally look for someone who will be there for a decade," the CSX shareholder said.

Bringing in Mr. Harrison would provide a succession plan for Mr. Ward, who took over as CEO in 2003 and has spent nearly four decades with CSX. Mr. Ward's retirement was delayed two years ago when the company lost its No. 2 executive, Oscar Munoz, to the top job at United Continental Holdings Inc.

Citi analyst Christian Wetherbee wrote in a research note Thursday that the situation is a "win/win/win" for Mr. Harrison, CSX management and shareholders. "CSX management may be more receptive than people think," he wrote.

Mr. Harrison began his career more than 50 years ago squirting oil under railcars. The blunt, demanding executive has attracted a loyal investor following for his detailed attention to cost-cutting and improved traffic times.

Word of Mr. Harrison's plan comes as the railroad industry sees brighter days ahead. Railroad operators last year suffered significant volume losses from fewer coal shipments, forcing employee furloughs and other cost reductions.

But operators are optimistic about the year ahead, including the potential for easing regulation and beneficial tax reform from Washington. Union Pacific Corp., which reported earnings Thursday, said it sees areas that are poised for growth, such as agricultural shipments, and improving consumer and business confidence.

"I wouldn't call that a robust economy," Union Pacific CEO Lance Fritz said in an interview, "but there's reason to be optimistic that we'll really start seeing some uptick in volume."

CSX, which operates one of two major rail networks east of the Mississippi, on Tuesday reported a slight decline in fourth-quarter profit but projected higher profit for the coming year despite a stronger U.S. dollar and low commodity prices.

One area where the company has room to improve is profitability. CSX has for years aimed to reach an operating ratio -- a measure of costs as a percentage of revenue -- in the mid-60s. In its last fiscal year, its ratio was just under 70%, as the loss of about $2 billion in coal business in recent years weighs on results.

"Obviously, that delays us getting there as quickly," Mr. Ward said on Wednesday's earnings call.

Union Pacific's Mr. Fritz declined to comment on Mr. Hunter's potential plans, but he said that Union Pacific had a longstanding opposition to consolidation of the major railroads because of the additional government scrutiny it could attract.

"We don't want to have a merger impact negatively the regulatory scheme of the industry," he said.

--Joann S. Lublin contributed to this article.

Write to Paul Ziobro at Paul.Ziobro@wsj.com

(END) Dow Jones Newswires

January 19, 2017 13:36 ET (18:36 GMT)

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