CSX Investors Cheered by Former Rail Rival's Sudden Switch -- 2nd Update
January 19 2017 - 3:33PM
Dow Jones News
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 called Mantle Ridge LP 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.
In a statement Thursday, CSX said its board of directors would
"actively evaluate" the views of Mantle Ridge and looked forward to
discussing the company's strategy with the investor and other
shareholders. The railroad also said its board and management team
remained supportive of the company's current growth strategy.
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 15:18 ET (20:18 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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