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Hunter Harrison - Date unknown Photographer unknown.
27 February 2017
CSX Puts the Brakes on
Hunter Harrison's Demands


Jacksonville Florida USA - A blue diesel locomotive lumbering over a trestle in New Jersey is easily passed by trucks on an adjacent highway.
 
It is owned by CSX, the third largest freight railroad in North America by revenue and also one of the slowest.
 
A star manager in the North American rail industry now wants to pick up the pace at the group, which has train speeds averaging about 20 mph on its 21,000 mile network.
 
Hunter Harrison walked away from a lucrative job running Canadian Pacific Railway (CP) to offer his services to CSX last month.
 
The question for CSX investors is if he is worth the price, including a compensation demand which it says adds up to US$300 million.
 
The CSX board wants Mr.. Harrison to be its next chief executive, it said earlier this month.
 
But it was not prepared to accede to what it called "extraordinary requests" from him and the activist investor backing him, Mantle Ridge.
 
Last week, CSX extended for a second time the deadline for nominating board directors, a sign that the two sides are still negotiating.
 
Mr.. Harrison, 72, is the father of "precision railroading", a set of practices that banished orthodoxies, such as waiting for trains to fill before departure, to focus on running them on time.
 
After he was installed at CP in 2012 by Pershing Square, the activist hedge fund led by Bill Ackman, train speeds quickened and the operating ratio, a measure of profitability, shifted from worst to second best among its peers.
 
CP and CSX are different, however.
 
CP runs trains across the vast open spaces of Canada, dipping into the northern US.
 
CSX trackage twists like spaghetti though packed communities of the US east.
 
Success in Alberta may be tougher to achieve in places such as Jersey City, New Jersey, where the slow-moving locomotive was spotted on the trestle, analysts say.
 
"CSX, and eastern railroading, are probably the most complex freight railroading in the world," said Anthony Hatch, analyst with ABH Consulting.
 
CSX has also been hit hard by the loss of coal shipments as power stations burn more natural gas.
 
Under Michael Ward, chief executive since 2003, the railroad has acknowledged that coal volumes may never return and launched the "CSX of Tomorrow," a plan that involves bifurcating its system into primary and local networks and expanding in businesses such as large standard container shipping.
 
Investors are betting Mr. Harrison will soon be executing his own plan instead.
 
Shares in the Jacksonville, Florida-based company have leapt more than 30 percent since 18 Jan 2017, when he forfeited US$90 million in benefits at CP to team up with Mantle Ridge, led by Paul Hilal, a former Ackman associate.
 
Last week CSX announced Mr. Ward will retire in May and said it would fire 1,000 of its 4,500 managers by next month.

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CP's operating ratio was 58.6 percent last year, down from 83.3 in 2012.
 
By contrast, at CSX it was 69.4 percent in 2016, 1.2 percentage points lower than in 2012.
 
Mr. Harrison, who led the Illinois Central (IC) and Canadian National (CN) railroads before joining CP, has long proclaimed his philosophy was universal.
 
When CP last year unsuccessfully attempted to take over Norfolk Southern (NS), another eastern US network, the company wrote, "Precision railroading is a set of non-discriminating principles that can be effectively applied to any railroad in the world."

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In a letter to the CSX board, Mr. Hilal said precision railroading would require "dramatic operational and cultural change".
 
At Mr. Harrison's CP this included the disappearance of thousands of jobs.
 
"They harass, humiliate, badger, and fire the employees. They've created a culture of fear at CP," said Douglas Finnson, president of Teamsters Canada Rail Conference, a labour union.
 
Talks between CSX and Mr. Harrison and Mantle Ridge have been stuck on pay and governance.
 
CSX has said Mr. Harrison wants compensation equal to US$300 million, including US$84 million to pay for the amount Mantle Ridge promised to cover his forgone compensation at CP.
 
Mantle Ridge disputes the amount, arguing it overstates the value of his proposed stock options.
 
Mr. Harrison, whose equity award would vest if he died, refused to allow a CSX appointed doctor to review his medical records, the railway company said.
 
The parties have also jousted over how many new board directors Mantle Ridge will help select.
 
The dispute may go before shareholders at a special meeting called by CSX.
 
But many analysts now see Mr. Harrison's arrival in Jacksonville as a fait accompli, not least because CSX's market value has grown by about US$10 billion purely on speculation over his arrival.
 
"It seems to us that shareholders have already voted for this change," said BMO Capital Markets.
 
Gregory Meyer.

Quoted under the provisions in Section 29
of the Canadian Copyright Modernization Act.
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