(Dow Jones Newswires circulated the following story by Doug Cameron on April 30.)
CHICAGO — The feud between CSX Corp. (CSX) and two hedge funds seeking to shake up management at the third-largest U.S. railroad intensified on Wednesday as both sides submitted detailed proposals ahead of a key shareholders’ vote.
The funds claimed their plans could boost CSX earnings by an extra $2.2 billion within five years, but the proposals were swiftly derided by executives at the Florida-based railroad.
CSX also revealed that TCI had proposed a leveraged buyout led by existing management in January 2007, a move that runs counter to claims by the funds that they are not seeking control of the company.
The Children’s Investment Fund, or TCI, and 3G Capital Partners outlined their proposals in a 79-page document filed with the Securities and Exchange Commission.
The plans represent the latest salvo in an eight-month campaign by the funds to shake up the CSX board and press for operational changes. The dispute will come to a head at a shareholders’ meeting on June 25.
CSX Chairman and Chief Executive Michael Ward said in a letter to shareholders Wednesday that it was a “potentially damaging agenda.”
The white paper from TCI and 3G, titled “CSX: The Case For Change,” offers details on the investors’ operating and capital spending plans, which have previously come under fire from both CSX management and members of Congress.
The two sides are now locked in a proxy battle after talks broke down in January, with the funds seeking to nominate a slate of five new directors to the 12-member CSX board at the June meeting.
Closing The Gap
Analysts said CSX, whose network is focused in the eastern U.S., has improved operations and closed the gap with peers on a number of industry metrics at a time when revenue and profits have climbed to record levels across the sector.
However, the two funds claimed CSX continues to lag the industry, and proposed a restructuring plan that mirrors the turnaround at Canadian National Railway Co. (CNI).
The white paper said annual operating profit at CSX could be boosted by an extra $1.8 billion in five years by applying the productivity measures of its Canadian rival. A series of other proposals would generate annual gains of $380 million, said the funds.
CSX reported operating profits of $2.22 billion in 2007, and management is targeting compound annual growth of 10% to 12%.
In the letter to shareholders, Ward at CSX defended the board members being challenged by the rival slate. He said the company had delivered industry- leading returns over the past five years, as well as record revenue and operating profit in the first quarter of 2008.
“Based on the company’s discussions with TCI over the last 16 months, your board has become convinced that TCI’s campaign threatens to undermine shareholder value,” he said in proxy materials sent to shareholders.
LBO Plan?
The funds are also critical of capital spending plans at CSX, but stop short of calling for any actual cuts. The railroad said TCI and 3G were looking to ” freeze” spending.
Infrastructure investment is becoming an increasingly politicized issue for U.S. railroads after years of low spending left the industry unprepared for a surge in demand in 2003, bringing some parts of the network to a halt.
The U.S. railroad industry remains on a roll, despite the softening domestic economy. Imports and agricultural exports have filled capacity, providing operators with pricing power.
With railroads reporting record profits and Congress considering a number of reregulation proposals, executives are wary of trimming investment plans despite widespread pressure to institute more “shareholder-friendly” measures.
CSX and others have launched large share-buyback programs, funded in part through debt issuance.
Ward said CSX would invest $5 billion between now and 2010 to capitalize on demand. “The CSX board is confident that this investment will drive long-term value creation.”
The Chief Executive recently accused TCI and 3G of seeking “effective control” of the company with its five-member slate of directors.
The funds denied the charge, but recognize it remains a sensitive issue that was raised at a hearing earlier this year of the House transportation committee, where it was also accused of using “aggressive” tactics that could lower railroad investment.
However, Ward re-ignited the issue by revealing that TCI had presented a leveraged buyout proposal to the current management team in January 2007 priced at $50 a share.
CSX has mounted a furious lobbying campaign in Congress and accused the funds of violating disclosure laws in building up a stake through swap contracts. TCI and 3G have disclosed a combined 8.7% stake in CSX, with another 12.3% held through derivatives contracts.
TCI and 3G said the two sides are no longer holding talks, and claimed CSX rejected a number of concessions, including a cut in the number of directors on their slate and a one-year standstill agreement on their activist proposals.
CSX shares touched a 52-week high of $62.94 on Tuesday, and were up $1.45, or 2.3%, to $63.39.