The activist investor seeking a management shakeup at CSX Transportation yesterday urged the railroad’s board to quickly negotiate a deal that would put E. Hunter Harrison in charge, rather than wait months for the results of a special shareholder meeting.
“We owe it to the shareholders to get a deal done promptly. Let’s do it,” Paul Hilal, who heads the Mantle Ridge hedge fund, wrote to CSX Director Edward Kelly III. “If you are willing, we are glad to meet in person and hammer this out this weekend, hopefully delivering good news to the shareholders early next week.”
CSX on Tuesday called a special meeting of shareholders, to be held sometime after March 16, where the railroad’s investors would be asked to vote on the “extraordinary requests” of Harrison and Mantle Ridge.
The CSX board said it had concerns about the size and structure of Harrison’s proposed $300-million contract as well as Mantle Ridge’s request for six board seats, which would give the fund effective control of the company.
In his letter, released to the media late Thursday afternoon, Hilal disputed CSX’s contentions and said he was open to discussions. The railroad inflated the size of Harrison’s compensation package, he wrote, and mischaracterized Mantle Ridge’s plan to reshape the CSX board.
Harrison’s compensation package, Hilal wrote, totals $32 million per year over four years — or $128 million. Of that, $20 million per year is performance-based. “His package is worth very little unless he performs spectacularly,” Hilal wrote.
CSX also miscalculated the value of Harrison’s proposed stock options at $160 million, Hilal wrote. The actual value is about $78 million, based on the price of CSX’s stock before the “Hunter rally” sent the stock soaring by nearly 30 percent, Hilal wrote.
Hilal defended Mantle Ridge’s request to receive a one-time $84-million payment, plus tax considerations of up to $23 million, that would reimburse the fund for the money and benefits Harrison forfeited in January by retiring five months early from the top job at Canadian Pacific.
Mantle Ridge disputed CSX’s contention that it was seeking six seats on the 12-member board. “This is not a battle for control,” he wrote.
Rather, Hilal said he was only seeking a seat for himself. And he said the fund was working with CSX to identify up to four new independent directors that the railroad and Mantle Ridge could agree upon. As CEO, Harrison also would have a seat on the board.
“Why are we asking that new directors be added? As we’ve discussed, Precision Scheduled Railroading requires dramatic operational and cultural change,” Hilal wrote. “Change like that starts at the top, with significant new blood on the Board not wed to the old ways or legacy decisions and with no ties to any previous strategy or anyone.”
Hilal helped lead Pershing Square’s successful 2012 proxy battle that ousted a majority of CP’s board and installed Harrison as CEO. With the full backing of CP’s board, Harrison quickly implemented his precision railroading system at CP, slashing costs and raising revenue.
Without a change in the CSX board, Hilal wrote, “the outcome and rate of the transformation will be at risk.”
In an interview with the Wall Street Journal, Harrison said he was disappointed that talks between Mantle Ridge and CSX had stalled.
“I wish the two sides would get together and allow for this value creation for the shareholders instead of going through these games which create nothing but further anxiety for the shareholders,” Harrison said.
Harrison, 72, turned Illinois Central, Canadian National, and CP into ultra-efficient and highly profitable railroads over the past three decades.
CSX, in a statement issued Thursday night, said it was reviewing Mantle Ridge’s letter and would continue to act in the best interests of shareholders.