Activist investor activity reignites rail merger hopes


Reuters — Shares of railway operator CSX Corp. soared 20 per cent on Thursday after an activist investor’s plan to shake up the U.S. rail operator fueled speculation that the company was once again a takeover target.

Investors rushed to bid up shares of CSX after news reports that former Pershing Square partner Paul Hilal was teaming up with Canadian Pacific Railway’s outgoing CEO Hunter Harrison to shake up the Jacksonville, Fla.-based firm.

The stock’s jump added more than US$6 billion to CSX Corp’s market value. Harrison, a well-known turnaround expert, has overseen a three-fold increase in CP’s stock price in five years at the helm. He has also tried to engineer consolidation in the North American rail industry in the past.

A person familiar with the matter said Hilal is aiming for a turnaround of the company rather than its sale. Hilal declined to comment.

While Harrison’s pursuit of a deal could now get another chance, regulatory and political obstacles remain.

Many large rail customers spoke out against CP’s bid last year for No. 4 U.S. railroad Norfolk Southern. The bid failed last spring in the face of criticism from lawmakers and customers, including package delivery giants FedEx and UPS.

“Still, we know Harrison wants to see that sort of deal. And we know CP wanted it as well. Perhaps what we are now seeing is a backdoor way for that deal to happen,” Gordon Haskett head of research Don Bilson, said in Thursday’s note.

Harrison has previously said that CSX has several strengths as a merger target, but stressed that he never made a formal offer for the U.S. railroad.

Keith Creel, who takes over as chief executive of CP on Jan. 31, told analysts on Wednesday that he expects future industry consolidation.

“I don’t know if it’s going to be two years, three years, five years,” he said. “But it’s inevitable. Volume growth is going to come. Railways are not going to be built (so) consolidation will occur. And I can certainly see that happening within my career.”

Hilal’s fund, Mantle Ridge LP, has raised more than US$1 billion and is in the final stages of working out an agreement with Harrison on their partnership.

CSX spokesman Gary Sease said the company and the board will evaluate Mantle Ridge’s views and looks forward “to discussing our core strategy.” The deadline for CSX shareholders to nominate directors is Feb 10.

Opposition to a CSX merger is already reemerging.

The CEO at Union Pacific said the No. 1 U.S. railroad remains opposed to mergers between major railroads in the U.S.; Lance Fritz told Reuters “we still think Class 1 mergers in the United States are not a good idea.”

Union Pacific had publicly opposed CP’s bid for Norfolk Southern.

Harrison has repeatedly touted U.S. rail industry consolidation as a way to improve efficiency and profitability. That view may find stronger support in the administration of U.S. President Donald Trump.

But there are also red flags for companies like Union Pacific. Trump has criticized the auto industry for building cars in Mexico for import into the U.S. and has threatened to impose a “border tax” or roll back the North American Free Trade Agreement (NAFTA).

Fritz said about 12 per cent of Union Pacific’s business is linked to Mexico, but added he is an “optimist” about the prospects for NAFTA even though Trump campaigned as a fierce critic of the North American Free Trade Agreement.

“While I think NAFTA is ripe for modernization in labor practice, environmental practice and e-commerce, it also represents a boon to the U.S. economy,” he said. “It benefits the U.S. consumer and creates U.S. jobs.”

— Michael Flaherty reports on corporate governance and activist shareholders for Reuters from New York. Additional reporting for Reuters by Nick Carey in Detroit and Allison Lampert in Montreal.


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