(Dow Jones Newswires circulated the following on April 30.)
CHICAGO —The hedge funds pursuing strategic reform at CSX Corp. (CSX) on Wednesday claimed their plans could double operating profits at the third-largest U.S. railroad operator within five years.
The Children’s Investment Fund, or TCI, and 3G Capital Partners outlined detailed plans for the Florida-based railroad in a 79-page document filed with the Securities and Exchange Commission, their latest salvo in an eight-month campaign to shake up the CSX board and press for operational changes.
The white paper, entitled “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 a shareholders’ meeting on June 25.
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 revenues 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.
The white paper said annual operating profit at CSX could be boosted by $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 10-12%.
The funds are also critical of capital spending plans at CSX, but stop short of calling for any actual cuts. 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.
CSX was not immediately available for comment. However, executives have defended their operating record and investment plans, and 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.
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 before closing down 0.2% at $61.94.