Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

Hunter Harrison really, really doesn't want to retire.

The 72-year-old announced late Wednesday that he's stepping down as CEO of Canadian Pacific Railway Ltd. six months ahead of schedule. He's not angling to get to the golf course faster, but rather wants to team up with an activist investor who's looking to agitate for change at CSX Corp., one of Canadian Pacific's competitors -- and a potential merger partner.

It all has an odd sense of deja vu. Harrison stepped down as CEO of Canadian National Railway Co. in 2009 only to be lured out of retirement in 2012 by Bill Ackman, who was seeking to improve Canadian Pacific's operations. Now it's Paul Hilal, who used to work at Ackman's Pershing Square Capital Management before starting his own fund, that's doing the luring with the apparent idea that the same magic can be worked at CSX. Investors cheered the news, driving the stock up as much as 19 percent on Thursday morning. 

Room to Improve
CSX's operating ratio (the lower the better for this gauge ) doesn't measure up to that of Harrison's former companies, Canadian National and Canadian Pacific
Source: Bloomberg, company filings

Perhaps Harrison wasn't content to ride off into the sunset before completing the major railroad deal he has often said is inevitable. Canadian Pacific's merger talks with Jacksonville, Florida-based CSX in 2014 went nowhere. A series of underwhelming and complicated bids for Norfolk Southern Corp. in late 2015 didn't impress shareholders and drew strong pushback from customers and legislators. Or maybe the opportunity to add yet another railroad turnaround to his legacy was tempting enough that Harrison was willing to forfeit C$118 million ($89 million) in benefits to be able to pursue it.

Harrison specializes in cutting costs and improving railroads' operating efficiency, and the two major railroads with the most work to do in those areas are CSX and Norfolk Southern. But in the wake of that railroad's takeover battle with Canadian Pacific, Norfolk Southern CEO Jim Squires has proven he's perfectly capable of making operational improvements of his own. Squires has also only been in the job for about a year and a half. And given Norfolk Southern's stock gains of late, Hilal may not get much backup from investors for a management shakeup.

Two Roads Diverged...
Norfolk Southern spiked after Canadian Pacific tried to buy it, but it's managed to build on those gains even after the deal fell through. Canadian Pacific is up just 2 percent since news of its overtures broke.
Source: Bloomberg
Data reflects Canadian Pacific's U.S. traded shares

CSX's CEO Michael Ward, on the other hand, has been in his post for more than a decade and analysts have speculated about his imminent retirement. Oscar Munoz at one point looked ready to take charge, but now he's running United Continental Holdings Inc. instead. It's not necessarily a great long-term strategy for CSX to replace its CEO with a 72-year-old, but the $40 billion company's most recent results indicate struggles with higher costs and raise questions about the railroad's ability to raise prices above cost inflation. Perhaps Harrison could get the company in shape for the next guy. He's certainly got the track record.

Off Track
CSX had a rare earnings miss for its fourth-quarter results as costs climbed
Source: Bloomberg

The bigger question is whether Harrison and Hilal's plan for CSX includes M&A. Even after the Norfolk Southern deal failed, Harrison continued to express the belief that consolidation would eventually happen. Hilal was on Canadian Pacific's board up until last January and reportedly worked closely with the CEO on his failed takeover efforts. Meanwhile, Harrison's successor at Canadian Pacific, Chief Operating Officer Keith Creel, is just as gung-ho about the need for deals. If these executives were on opposite sides of a deal, that's one less hurdle.

It would be unusual, sure, but not really that different in practice than Canadian Pacific's proposal to put itself in a trust and send Harrison to run Norfolk Southern while that deal awaited regulatory approval. The C$118 million in sacrificed benefits at least draws a clearer line on Harrison's independence from his former company.

Any transaction would have to be approved by the Surface Transportation Board, which requires that rail mergers benefit the public interest. In theory, President-elect Donald Trump could try to swing the STB toward a deal-friendly stance. But Trump would be an odd champion for a CEO who's built a reputation for slashing headcounts. FedEx Corp., the U.S. Army and the Congress members who spoke out against a Norfolk Southern takeover probably haven't changed their minds. Low odds of regulatory sign-off didn't stop Harrison before, though.

Either way, he's not going anywhere anytime soon. After Harrison started slashing costs at Canadian Pacific, one follower of the company joked in 2014, "You're just the right age so that when you retire from CP, you can go and bring down the operating ratio of the whole United States of America." Donald Trump already has a budget director, but CSX could do a lot worse than having Harrison at the helm.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. The STB's chairman and vice-chairman have time left on their terms, but there's room for additional members. The president can appoint no more than a majority from his own party for the five-member board. Appointees have to be confirmed by Congress. 

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net