By Michael Flaherty and Allison Lampert
NEW YORK/MONTREAL (Reuters) - A portfolio manager from an influential shareholder has thrown her support behind a plan to put railroad industry veteran Hunter Harrison into CSX Corp's (CSX.O) CEO chair with the help of an activist investor.
Harrison, 72, the outgoing chief executive of Canadian Pacific Railway Ltd (CP.TO), is partnering with activist investor Paul Hilal's new fund, Mantle Ridge LP. The fund is acquiring a large stake in CSX with the hope of installing Harrison to improve the U.S. railroad’s performance, people familiar with the matter have said.
"I think it's a win-win. He's demonstrated, time and again, a unique gift to run a railroad," said Sandy Pomeroy, a portfolio manager at Neuberger Berman LLC, which owned 1.2 percent of CSX shares as of Sept. 30 and is the company's tenth-largest shareholder.
"It's hard to imagine he can't go into CSX and improve operations faster," said Pomeroy, one of several Neuberger portfolio managers who own CSX shares.
While Pomeroy's backing provides a key boost for their plan, the move could still face stiff resistance from CSX, which successfully fended off an activist attempt from TCI Management and 3G Capital Partners in 2008.
Harrison's track record of cutting operating costs and driving up profitability at the helm of CP and at Canadian National Railway Co (CNR.TO) has boosted CSX shares 30 percent since news of the Mantle Ridge plan surfaced last week.
Investors are betting that Harrison can engineer similar improvements at the third-largest U.S. railroad and hope his quest to consolidate the industry could result in a deal for CSX. Harrison led an unsuccessful $28 billion bid last year by CP for U.S. railroad Norfolk Southern Corp (NSC.N).
GREATER INVESTOR SCRUTINY
Harrison's efforts have inspired investors to put the performance of the two East Coast U.S. railroads under greater scrutiny. However, CSX presents a different set of challenges than the Canadian railroads.
Norfolk Southern and CSX’s networks have been described by analysts as “a bowl of spaghetti,” which would make it more difficult to run trains at higher speeds to save money. Declining coal volumes have weighed on CSX's revenue in recent years.
CSX "welcomes the views of all of our shareholders,” a company spokesman said by email on Wednesday. “Likewise, its board and management team remain supportive of the company’s strategic growth strategy, which has started to deliver sustainable value for shareholders."
CSX said its operating ratio, a key metric, was 69.4 in 2016 and has plans to improve it to the mid-60s. The lower the ratio, which measures operating costs as a percentage of revenue, the more efficient the railroad. Norfolk Southern on Wednesday reported an operating ratio of 68.9.
Norfolk Southern aims to improve its OR below 65 by 2020, the end of a company five-year improvement plan, Chief Executive Jim Squires said in an interview.
CP has said its 2016 operating ratio was 58.6, while CN reported an operating ratio of 55.9 for the year.
Harrison is also expected to face pushback from organized labor at CSX after clashing with unionized workers at CP. During Harrison’s tenure at CP, open grievances have skyrocketed among workers in western Canada, rising to more than 7,000 now from 400 when he arrived in 2012, according to the Teamsters Canada Rail Conference.
"I can't imagine that we'd be anything but opposed," said John Risch, legislative director of the Sheet Metal, Air, Rail and Transportation Workers (SMART) union, which represents CSX conductors, engineers, trainmen and yardmasters. "The Hunter Harrison approach is short-term profit."
Any push to quickly replace CSX's existing CEO, Michael Ward, who plans to retire in 2019, would need to occur before the company's Feb. 10 director nomination deadline. If the two sides fail to strike a deal, Hilal may be forced to nominate a slate of directors who can put Harrison in the CEO seat.
Hilal, a former partner at Pershing Square, and Harrison, who will be officially replaced as CP's CEO on Jan. 31, have not yet announced a formal plan and were not available for comment on Wednesday.
Mantle Ridge has raised more than $1 billion for its CSX stake, according to people familiar with the matter. Harrison, who last week resigned earlier than expected from Canadian Pacific, has confirmed that he is working with Hilal.
(Reporting by Michael Flaherty in New York and Allison Lampert in Montreal, additional reporting by Nick Carey in New Orleans; Editing by Meredith Mazzilli and Matthew Lewis)