CSX Names Harrison CEO, Warns He'll Exit Without $84 Million

  • Railroad bows to pressure from activist investor Paul Hilal
  • Analyst sees new chief driving efficiency at industry laggard

Why Hunter Harrison May Be Worth $200 Million to CSX

CSX Corp. appointed Hunter Harrison as chief executive officer effective immediately, entrusting the industry veteran with the task of turning around North America’s least efficient railroad. He’ll stick around as long as shareholders are willing to meet his pay demands.

Harrison will resign after the 2017 annual meeting unless shareholders accept his request for $84 million to cover forfeited pay from his old job plus the assumption of a related tax indemnity, CSX said in a statement. He’ll join the board along with ally Paul Hilal, the founder of activist fund Mantle Ridge, and three others with their backing.

The CSX appointment sets up a new challenge for Harrison, 72, who in a five-decade career made Canadian Pacific Railway Ltd. into a top performer, solidified Canadian National Railway Co. as the leanest North American railroad and overhauled Illinois Central. He’s taking on his latest job less than two months after resigning as CEO of Canadian Pacific, where he used his “precision railroading” approach to transform the company with cost cuts and speedier service.

“The board is united behind a shared goal -- creating value for shareholders and all stakeholders by implementing the Precision Scheduled Railroading model at CSX,” Hilal said in the statement Monday. “Together, we have created the conditions for success. Now the real work begins.”

Chairman’s Role

CEO Mike Ward will retire effective immediately and become a consultant to CSX. Edward Kelly will take over Ward’s role as chairman of the board, while Hilal will become vice chairman.

CSX said shareholders should vote on whether to accept Harrison’s $84 million request. Mantle Ridge already agreed to protect Harrison on an interim basis with respect to that sum. While an annual meeting has yet to be scheduled, it has typically been held in May, said Gary Sease, a spokesman for the Jacksonville, Florida-based company.

Harrison will be awarded options to purchase 9 million CSX shares at the current price. The options will vest over four years. CSX rose 0.3 percent to $49.95 at 9:42 a.m. Tuesday in New York.

Precision Railroading

“Four years is a reasonable time frame for Mr. Harrison to execute precision railroading at CSX and achieve substantial operating improvements,” Walter Spracklin, an analyst with RBC Capital Markets in Toronto, said in a note to clients. He predicted Harrison would more than double annual profit to $4.02 a share by 2020.

Read more: Is a CEO Worth $200 Million? Shareholders at Rail Giant Think So

A stock surge of more than 30 percent since CSX said it was evaluating a push by Harrison and Hilal to take management control has driven the company to this year’s third-biggest gain on the S&P 500 Index.

The railroad was the worst performer last year among major North American carriers on an efficiency gauge known as operating ratio, according to data compiled by Bloomberg. The benchmark measure, in which a lower number is better, was more than 69 percent. Harrison should be able to reduce the number to 58 percent by 2020, Spracklin estimated.

Jason Seidl, an analyst at Cowen & Co., predicted Harrison will expand CSX’s current effort to eliminate 1,000 management jobs to include rank-and-file workers.

“Mr. Harrison’s proverbial playbook of cutting fat and running a scheduled railroad may not seem complicated but his methods are time-tested,” Seidl wrote in a note.

Precision Railroading

Harrison developed the concept of so-called precision railroading while at Illinois Central, running shipments and carloads on fixed timetables to ensure reliable deliveries.

In his four years as CEO of Canadian Pacific, Harrison cut staff, stored locomotives and pushed the railroad to run longer and faster trains to reduce fuel and labor costs. He also closed several hump yards -- used to separate and sort rail cars -- and intermodal terminals in cities including Chicago and Milwaukee to trim operating costs and set the stage for potential land sales.

Canadian Pacific’s annual operating ratio plunged to less than 59 percent last year from 83 percent in 2012, the year Harrison joined the Calgary-based carrier. Net income more than tripled during the same period to about C$1.6 billion ($1.2 billion) last year from C$484 million in 2012.

While at Canadian Pacific, Harrison twice tried to acquire CSX -- first in 2014 and again last year.

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