Harrison is officially in as CEO of CSX

What was widely expected in freight railroad and intermodal circles became official yesterday, when Class I railroad carrier CSX officially announced that E. Hunter Harrison was named CEO of Jacksonville, Fla.-based CSX. With Harrison now in as CEO at CSX, he takes over for Michael Ward, who retired from CSX last month and is now serving as a consultant for the company, according to CSX.

Harrison’s path to CSX has seen some ebbs and flows going back to January 18, when he was speaking on a fourth quarter earnings call for Canadian Pacific Railway, where he was CEO. But things became somewhat less routine later that day, as he stated that he would be retiring from CP, effective January 31, when Keith Creel, CP president and COO, would take over as CP President and CEO. And CP said that Harrison had approached the company’s board to “discuss his retirement from CP and potential related modifications to his employment arrangements that would allow him to pursue opportunities involving other Class 1 Railroads.”  

That “other” Class I railroad was CSX, with Harrison partnering up with Paul Hillal, an activist investor whom was formerly with Pershing Square Management, the single largest CP shareholder at the time with a 14.1 percent stake in the company, who called for a proxy vote in 2012, when the CP board decline to replace former CEO Fred Green, and CP shareholders and proxy firms eventually won out in electing seven new directors that subsequently led to management changes, including the appointment of Harrison as CEO, switching over from Canadian National, where he had resigned from in 2009.

Hilal’s fund, Mantle Ridge LP, a January Wall Street Journal report noted, has raised more than $1 billion for a single investment, with investors committed to locking up their money in the fund for five years. Hilal played a key role in recruiting Harrison, when he was with Pershing Square in the proxy battle against CP in 2012.

As part of Harrison joining CSX, the company said that it had reached an agreement with Mantle Ridge to “reconstitute the Company’s Board of Directors,” with CSX appointing five new directors to its board, including Harrison, Hilal, Dennis Reilley, Linda Riefler, and John Zillmer. And it added that three incumbent directors plan to complete their service at or before the end of 2017 CSX annual meeting.

“I am proud to join the dedicated and talented railroaders at CSX,” Harrison said in a statement. “Together, we will implement Precision Scheduled Railroading – a model proven to improve safety, create better service for customers, produce a proud and winning culture for employees, and generate exceptional, lasting value for shareholders.”

In his more than 50 years in the freight railroad sector, Harrison has a proven track record of success. When he joined CP in 2012, the company’s OR was 81.3 percent, a figure that has seen major improvement to today’s 58.6 percent. During his time at CN and CP, Harrison was widely known for his focus on “precision railroading,” which requires cargo to be ready when rail cars arrive for loading or risk being left behind. CP said in April 2016 that precision railroading has helped it to lower its operating ratio dramatically, improve service, reinvest record amounts in its network and in the communities it serves, and create significant shareholder value in a very short time.

While at the helm of CP, Harrison made individual overtures to both CSX and Norfolk Southern to combine CP with each of them to create a true coast-to-coast railway that enhances competition and generates significant shareholder value.

Neither proposal came to fruition, though, with CSX and CP never getting to actual negotiations in the form of making an actual offer, as reported in October 2014. In the case of NS, CP made a nearly $30 billion offer, which was squelched in April 2016.

Despite repeated attempts by CP, NS refuted the offers, saying that in December 2016 its board came to the conclusion that CP’s indication of interest was “grossly inadequate, creates substantial regulatory risks and uncertainties that are highly unlikely to be overcome, and not in the best interest of the company and its shareholders.” 

But unlike those two Harrison-led bids for CP to acquire the Eastern Class I railroads, this development regarding Harrison and Hilal’s interest in CSX is not being done with the objective of railroad consolidation, nor should it be viewed as a covert M&A attempt, wrote Tony Hatch, principal of New York-based ABH Consulting, in a recent research note.

“For those proposed or suspected deals,  many stakeholder groups (unions/shippers/other rails/etc) at least initially opposed those (any?) combinations -  but the investment community, having made money with Harrison at Illinois Central and Canadian National, clearly did not,” he wrote. “And now they have the ‘EHH-fixes-CP’ story to brag about as well. A common refrain was ‘if only EHH had come to an eastern railroad alone rather than with a merger plan & CP’ – well, this might be that wish granted.”

While Harrison serving in a senior management role at CSX could have significant financial benefits for CSX, Hatch wrote that it also comes with some risk, based on historic performance.

“The New Model Railroad faces threats (the permanent, secular loss of coal business, perhaps AV (autonomous vehicle) trucking down the pike) and cost cutting, the EHH specialty, cannot be the only answer,” he noted.  “The opportunities to grow are highly service oriented, and require capital, finesse, IT as well as productivity improvements - intermodal, particularly domestic, and merchandise.” 

CSX had $11.1 billion in 2016 revenue despite a 5 percent decline in volume as its coal business fell 21 percent, while earnings per share came in at $1.81, operating income was $3.4 billion, and its operating ratio was 69.4.