Hedge fund urges CSX shareholders to retain Harrison as CEO

Stock price would tumble without precision scheduled railroading, Mantle Ridge says
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A screen capture image from a presentation Mantle Ridge made available on a website in April.
Mantle Ridge's https://csxadvisoryvote2017.com/ website
NEW YORK — CSX Transportation shareholders are widely expected to approve a request to reimburse new CEO E. Hunter Harrison and his activist investor partner $84 million for the money Harrison forfeited by leaving early from the top job at Canadian Pacific.

But the Mantle Ridge hedge fund isn’t taking any chances.

In the last week of April, the fund posted a 41-page presentation detailing the reasons why shareholders would be shooting themselves in the foot if they vote “no.”

Chief among them: Harrison will resign if the measure is not approved at the annual meeting of shareholders on June 5. And if he walks away, so does the railroad’s transformation and the 38 percent jump in CSX’s stock price.

CSX’s stock market value has increased $12.4 billion since Jan. 18, the day Harrison resigned five months early from CP. The quick gain would evaporate without Harrison at the helm, Mantle Ridge contends.

The presentation notes that all 21 Wall Street analysts who cover CSX have raised their stock price targets, and done so by an average of 55 percent. The average 12-month price target now sits at $58, or 13 percent above Monday’s closing price of $51.52.

The analysts are banking on Harrison’s precision scheduled railroading operating model producing similar performance — and stock market returns — as it did on Illinois Central, Canadian National, and CP.

Mantle Ridge emphasizes that the advisory vote is not contested because the CSX board is seeking input and has not taken a position on the matter.

The fund also says the $84 million is simply reimbursement for Mantle Ridge and Harrison.

“From a financial perspective, these forfeitures were equivalent to Mr. Harrison transferring funds from his bank account to CP,” Mantle Ridge says.

To get Harrison out of his CP contract, Mantle Ridge offered him financial protection: An $84 million contingency in the event he did not get hired at CSX. Mantle Ridge paid Harrison $55 million of that in January, an amount he will have to return to the fund if he stays at CSX. The railroad will reimburse Harrison $29 million, plus pick up the tab for taxes, if shareholders approve the resolution.

The size of the reimbursement is similar to what CSX would have had to pay CP if it negotiated the deal itself, Mantle Ridge contends. And there’s no way that would have happened, the fund argues.

“We believe that this two-step process — first freeing Mr. Harrison from CP and his non-compete, and second presenting him to CSX — was the only way to effect the hiring of Mr. Harrison as CEO of CSX,” Mantle Ridge says.

Based on the size of the railroads, the scope of the reimbursement is similar to the payment CP made to Harrison after CN cut off his pension and stock benefits when he came out of retirement to lead CP, the fund says. It also amounts to a cost of less than 12 cents per share.

“Would any shareholder out there be willing to pay 10 cents a share in additional compensation in order to get what is $14 a share increase in stock price? I think you’ll find that 99.9 — no 100 percent of shareholders will vote yes,” Avondale Partners analyst Donald Broughton told Canada’s Business News Network, the fund notes.

The presentation also details operating ratio improvements at IC, CN, and CP under Harrison; the stock market performance of CN and CP since Harrison’s departure, and covers Harrison’s compensation package at CSX.

He became CSX chief executive on March 6 and has since pledged to reduce the railroad’s operating ratio to the mid 60-percent range this year and the low 60s next year.

The Mantle Ridge presentation is available at csxadvisoryvote2017.com, along with instructions on how CSX investors can cast their ballots head of the annual shareholder meeting.

NEWSWIRETrains News Wire

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