(Bloomberg News circulated the following story by Angela Greiling Keane on June 24.)
NEW YORK — CSX Corp., under pressure from its two biggest hedge-fund investors to change the company’s board and increase profit, may raise freight rates and buy back more stock to boost shareholder returns.
TCI Fund Management LLP and 3G Capital Partners Ltd. say CSX, the third-largest U.S. railroad, can double earnings before interest and taxes in five years if it lifts prices further and reduces spending. Jacksonville, Florida-based CSX has already pushed up rates and added 3.4 billion shares to a repurchase program since TCI began its campaign in May 2007.
At tomorrow’s annual meeting at a New Orleans rail yard, shareholders will choose among five candidates backed by the hedge funds or management nominees for the 12-member board. The ballot also includes a proposal by London-based TCI, also known as Children’s Investment Fund Management Ltd., to make it easier for shareholders to call meetings. TCI and 3G together own about 8.7 percent of CSX shares.
“If we’re successful here in the proxy contest, the value that will get created for CSX shareholders will surpass that of any other railroad,” TCI Partner Snehal Amin said. “Over a five-year period, we think earnings can quadruple.”
The 46 percent gain for CSX this year makes it the best performer in the Dow Jones Transportation Average after Ryder System Inc., the biggest U.S. truck-leasing company, which has climbed 54 percent.
CSX fell 79 cents, or 1.2 percent, to $64.04 in New York Stock Exchange composite trading yesterday.
The stock may rise 12 percent over the next year, according to the average price estimate compiled by Bloomberg from the three best-performing analysts covering the company.
Tiger Buys
The proxy fight has attracted purchases from hedge funds, including Tiger Global Management LLC and TPG-Axon Capital Management LP, according to regulatory filings.
Tiger was the biggest CSX buyer in the first quarter, amassing a 2.1 percent stake. It was followed by TPG-Axon, which more than doubled holdings to 2.4 percent, and Chase Investment Counsel, a firm overseeing about $7 billion that bought 3.47 million shares, or almost 1 percent. Tiger founder Chase Coleman and TPG-Axon Chief Executive Officer Dinakar Singh didn’t return calls seeking comment.
“It’s safe to say we’ll vote in the interest of shareholders,” said Peter Wood, a senior security analyst at Chase Investment Counsel, based in Charlottesville, Virginia. “Right now we think the current management is doing a good job.”
CSX has almost tripled in the past three years.
“Somehow, that doesn’t seem to be underperformance,” said CEO Michael Ward, 57. “We were an underperformer in ’04, but we’ve made dramatic improvements.”
Split Vote
Ward got a boost last week when proxy adviser Egan-Jones recommended investors vote for management’s board slate. Two other firms, Proxy Governance Inc. and Glass Lewis & Co., advised shareholders to split their vote to support two of the five hedge-fund nominees.
RiskMetrics Group’s ISS Governance Services, the largest proxy adviser, recommended that investors vote for all of the funds’ candidates except Gary Wilson.
Egan-Jones based its decision largely on TCI’s rejection of a CSX offer to give the hedge-fund group three board spots with a fourth to be mutually agreed upon, Managing Director Kent Hughes said.
“There’s no question that their attempt to put five directors on the board is a bit of an overreach and is disproportionate to their holdings,” he said.
Cut Spending
TCI and 3G, based in New York, say CSX isn’t doing enough to boost returns for investors. The funds, which teamed up in December, have asked CSX to cut capital spending and increase debt to repurchase stock.
Passenger airlines and Canadian National Railway Co., the only North American freight railroad offering scheduled service, show how CSX can increase earnings by charging variable rates based on demand, according to TCI, an activist fund that manages $19 billion.
CSX has said the railroad could improve operations, though TCI’s demand that it mimic Canadian National is too simplistic.
Board nominee Wilson is a former chairman of Northwest Airlines Corp., and Gilbert Lamphere served as a director of Canadian National and railroad operator Florida East Coast Industries Inc., now owned by Fortress Investment Group.
CSX has been “one of the laggards” among rail stocks and has more room to rise, said John Barnes at BB&T Capital Markets. The Richmond, Virginia-based analyst produced a 45 percent return over the last 12 months, the second-best among his peers, according to Bloomberg data. He’s one of two who say to buy the shares; 11 recommend holding and one advises selling.
`Major Laggard’
“They were a major laggard to their chief competitor, Norfolk Southern, and still are,” Barnes said. “The potential is there for them still to improve.”
TCI, which last year successfully pushed for the breakup of ABN Amro Holding NV, the biggest Dutch bank, is also fighting a proxy battle in Japan, where it’s asking J-Power, a utility formally known as Electric Power Development Co., to raise the dividend and change corporate governance.
Before voting Chase’s CSX shares, Wood said he would evaluate both sides’ arguments. He cited the railroad’s debt-to- assets ratio, which is the highest among the four largest U.S. railroads at 28.4 percent, Bloomberg data show.
“Increasing the risk level by levering up — I’m not sure how much that really adds,” Wood said. “That wasn’t the main way they were going to increase shareholder value.”