(The following story by Robert Wright appeared on the Financial Times website on October 26.)
JACKSONVILLE, Fla. — The chief executive of CSX, the US railroad under pressure from The Children’s Investment Fund, has hit back at the activist hedge fund saying it had a history of presenting flawed plans.
In a Financial Times interview, Michael Ward defended the recent record of CSX, one of only two major railroad operators on the US eastern seaboard. Returns to shareholders in the past three years had been the sector’s best, he said. He sarcastically dismissed the TCI’s proposals as “more good ideas”.
Mr Ward insisted he was right to propose spending $5bn over the next three years on expansion to cope with the surge in traffic which has restored railroad returns after decades of decline. TCI, the company’s second largest shareholder with a 4.1 per cent stake, said CSX’s spending was unjustifiably high given its returns.
“The amount of capital we’re spending is right in line with what everybody else in this industry is spending,” Mr Ward said. “We have a process where before we do any investments we ask, ‘Does it increase return on invested capital?’ We do it like every other company.”
TCI has previously forced changes of direction by managements at ABN Amro, the Dutch bank, and Germany’s Deutsche Börse. But Mr Ward presented a letter published on October 17 detailing its complaints about CSX as only the latest of a series of poor strategic plans by TCI.
According to Mr Ward, TCI had first suggested management launch a leveraged buy-out of CSX, but his team concluded the plan was unfeasible. TCI had then suggested borrowing heavily – to the detriment of CSX’s credit rating – for a more aggressive share buy-back programme than currently planned.
“Given what’s happened with the credit crunch, I think we’re very glad we didn’t follow that advice,” Mr Ward said.
Most recently, the fund suggested CSX aim to double the rates it charged customers over the next 10 years, which had generated extremely negative reaction from both customers and regulators.
“Now they have more good ideas,” Mr Ward said.
TCI criticised CSX’s investment plans partly because it thought any spending dangerous while Congress was debating new legislation to limit railroads’ rates, as happened before the passage of the 1980 Staggers Rail Act. But Mr Ward doubted the threat was greater than any of numerous other measures over the past 20 years.
“You have to make your best judgment what’s going to happen,” he said. “We would have been sitting here for the last 20 years not making investments if we were always continuously saying, ‘Gee, ahead we have regulation’.”