January 25, 2017 / 8:13 PM / 7 months ago

CSX shareholder backs Harrison for CEO as activist swoops in

NEW YORK/MONTREAL, Jan 25 (Reuters) - A Neuberger Berman LLC portfolio manager has thrown her support behind a plan to put railroad industry veteran Hunter Harrison into CSX Corp's CEO chair with the help of an activist investor.

Harrison, the outgoing chief executive of Canadian Pacific Railway Ltd, is partnering with activist investor Paul Hilal's new fund, Mantle Ridge LP. The fund is acquiring a large stake in CSX in the hope of installing Harrison to turn around the U.S. railroad's performance, people familiar with the matter have said.

"I think it's a win-win. He's demonstrated, time and again, a unique gift to run a railroad," said Sandy Pomeroy, a portfolio manager at Neuberger Berman, which owned 1.2 percent of CSX shares as of Sept. 30 and is the company's 10th largest shareholder.

"It's hard to imagine he can't go into CSX and improve operations faster," said Pomeroy, one of several Neuberger portfolio managers who own CSX shares.

While Hilal, a former partner at Pershing Square, and Harrison have not announced a formal plan, any push to quickly replace CSX's existing CEO, who plans to retire in 2019, would need to get done before the company's Feb. 10 director nomination deadline. If the two sides fail to strike a deal, Hilal may be forced to nominate a slate of directors who can put Harrison, 72, in the CEO seat.

Mantle Ridge has raised more than $1 billion for its CSX stake, according to people familiar with the matter. Harrison and Hilal could not be reached on Wednesday for comment.

Harrison's track record of cutting operating costs and driving up profitability at the helm of CP and at Canadian National Railway Co has boosted CSX shares 30 percent since news of the Mantle Ridge plan surfaced last week.

Investors are betting that Harrison can engineer similar improvements at the third-largest U.S. railroad and hope his quest to consolidate the industry could result in a deal for CSX. Harrison led an unsuccessful $28 billion bid last year by CP for U.S. railroad Norfolk Southern Corp.

Harrison's efforts have inspired investors to put the performance of the two East Coast U.S. railroads under greater scrutiny. However, CSX presents a different set of challenges than the Canadian railroads.

Norfolk Southern and CSX's networks have been described by analysts as "a bowl of spaghetti," which would make it more difficult to run trains at higher speeds to save money. Declining coal volumes also have weighed heavily on CSX and Norfolk Southern's revenues.

CSX "welcomes the views of all of our shareholders," a company spokesman said by email on Wednesday. "Likewise, its board and management team remain supportive of the company's strategic growth strategy, which has started to deliver sustainable value for shareholders."

CSX said its 2016 operating ratio, a key metric, was 69.4, while Norfolk Southern on Wednesday reported an operating ratio of 68.9.

By comparison, CP said its 2016 operating ratio was 58.6, while CN reported an operating ratio of 55.9 for the year. The lower the ratio, which measures operating costs as a percentage of revenue, the more efficient the railroad.

Harrison and Hilal could face resistance from CSX, which already has a strategy to improve its operating ratio to the mid-60s and fended off an activist attempt from TCI Management and 3G Capital Partners in 2008.

Harrison is also expected to face pushback from organized labor at CSX after clashing with unionized workers at CP. During Harrison's four-year tenure at CP, grievances have skyrocketed among unionized railroad workers in western Canada, rising to 5,000 in 2016 from 400 in 2012, according to the Teamsters Canada Rail Conference.

"I can't imagine that we'd be anything but opposed," said John Risch, legislative director of the Sheet Metal, Air, Rail and Transportation Workers (SMART) union, which represents CSX conductors, engineers, trainmen and yardmasters. "The Hunter Harrison approach is short-term profit."

Harrison, who last week resigned earlier than expected from Canadian Pacific, has confirmed that he is working with Mantle Ridge. (Reporting by Michael Flaherty in New York and Allison Lampert in Montreal, additional reporting by Nick Carey in Louisiana; Editing by Meredith Mazzilli)

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