Look out, Old Mackie's back!

Posted by Fred Frailey
on Thursday, January 26, 2017

Like Mack The Knife, Hunter Harrison is back and on the prowl again. He severed his ties to Canadian Pacific six months early and walked away from more than $100 million he would have gotten for standing still a bit longer. Word on the street is that he and investor Paul Hilal have their eyes on CSX—Hilal to engineer a proxy fight for control of the company (if need be) and Harrison to run the show.

Myself, I’m making no predictions. I didn’t cover myself with glory a year ago, when Canadian Pacific, with Harrison at its helm, made a run at Norfolk Southern. For that matter, neither did Hunter. He underestimated (as did I) the staying power of Norfolk Southern’s new CEO, Jim Squires, and was clueless how to proceed when the rest of the rail industry rose in united opposition to his plans for a merger of the two railroads and easily got the U.S. government to take sides.

The experience humbled me, but not Hunter Harrison. As I said, he’s on the loose, and I keep getting asked what I think.

The plan could succeed, even peacefully. Like CP, CSX has suffered from decades of poor executive management. The current chief executive, Michael Ward, has tried to overcome this legacy, but he’s past normal retirement age and his number two, president Clarence Gooden, is nearly there. So there’s nothing to prevent their giving Hilal seats on the board and Harrison (who at age 72 seems young at heart) the keys to Ward’s comfortable suite on the fifteenth floor of 500 Water Street.

But Ward strikes me as a fighter, not a quitter. He fought The Children’s Investment Fund, a British investment company that sought control of the CSX board a decade ago. The Brits got some of their candidates elected to the board, but they never sought to oust Ward. Ward would be acting quite in character to resist.

What if he does? Look out, Michael, is my advice. Paul Hilal would be a formidable opponent. He probably knows railroads better than anyone in the investment business. Working for Bill Ackman’s Pershing Square Capital Management, Hilal was the person who recruited Hunter Harrison out of retirement. Then he was the behind-the-scenes field marshal for the 2012 proxy battle at Canadian Pacific. Poor Fred Green, then CP’s hapless chief executive, never stood a chance. Pershing Square collected proxies for 94 percent of the shares. Now Hilal runs his own hedge fund, Mantle Ridge, and I reckon he remembers how to wage a proxy war. He has until February 10 to nominate a slate of directors. If he does, the odds would favor him—such is Hunter Harrison’s reputation among investors.

My friend and mentor, the consultant and writer Roy Blanchard, tells Railway Age that CSX already practices Harrison’s brand of “precision railroading.” I’m not as convinced of that, and in any case CSX has been too slow to adapt to the new reality, the decline of coal. Why even hold on to the coal-gathering network? Spin it off—someone will buy it. Or combine it with the coal trackage of Norfolk Southern and either spin it off or run it like they do Conrail Shared Assets. But I suspect both railroads remain prisoners of the mentality of their coal departments, which mistake a dead-cat bounce in coal business as the start of a permanent renewal.  

One other thought: CSX may be on to something with its “CSX of Tomorrow.” It seeks to drive as much traffic as possible onto the CSX lines connecting Chicago, New Jersey, and Jacksonville, while investing in additional capacity on these lines and spending less than in the past on the “feeder” routes to this triangle. If this is such a good idea, why not go the rest of the way and sell these feeder lines to startup regional railroads? My point is, CSX would still get most or all of the business but not be saddled with maintaining the assets. I doubt it would take a Hunter Harrison long to reach this same conclusion.

Peace or war—which will it be? We’ll know in two weeks, by February 10.—Fred W. Frailey

 

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