Possible corporate takeover of CSX

CSX stock went up 29% in January on rumors of a corporate takeover. The same CSX that let a plume of toxic chemicals leak below its Rice Rail Yard in Waycross, including into the upper Suwannee River watershed. It’s not clear a corporate takeover would do anything to stop that, or other possible contamination in for example Valdosta.

John Burr, WJCT, 6 February 2017, Business Brief: CSX Board To Consider Possible Takeover Friday,

This week, the board of the Jacksonville-based CSX railroad will consider a company takeover.

CSX is the largest publicly owned company in town and North America’s third-largest railroad, valued at $43 billion. About 3,500 employees work for the company in Northeast Florida.

Former Canadian Pacific railroad CEO Hunter Harrison and his affiliated hedge fund, Mantle Ridge, are targeting CSX.

Harrison approached CSX twice in recent years with an offer to merge with Canadian Pacific but was rebuffed. Now, according to the Wall Street Journal, he’s meeting with CSX board members to negotiate the terms of a takeover. It’s reported Harrison wants to name at least three new board members at a meeting set for Friday, Feb. 10, and effectively take control of the company and become the CEO, replacing current CEO Michael Ward.

Don Capener, the dean of Jacksonville University’s Davis College of Business, says although he’s not super familiar with the terms of the deal, based on the history of other takeovers, Jacksonville should be wary.

There’s more in that WJCT article about no talk from CSX about poison pills to ward off a takeover, which could mean that CSX welcomes it.

Neha Chamaria, Fox Business (apparently from fool.com), 6 February 2017, Why CSX Corporation Stock Popped 29% in January,

What happened

Shares of railroad giant CSX Corporation(NASDAQ: CSX) shot through the roof in mid-January after headlines announced rumors of growing interest in the company from activist investor and former CEO of Canadian Pacific Railway (NYSE: CP) Hunter Harrison. CSX ended January with hefty 29% gains.

So what

Activist investment isn’t anything new, but CSX’s is an interesting case. To begin with, Harrison suddenly stepped down as CEO of Canadian Pacific last month. The Wall Street Journal reported that he had quit the company to team up with another activist investor, Paul Hilal, to target CSX and gain representation on its board of management. Investors in CSX may remember that Harrison had even made a friendly takeover offer to CSX last year in his capacity as Canadian Pacific’s CEO. Yes, Harrison has been eyeing CSX for quite some time now.

As investor activism is usually deemed to unlock greater shareholder value, investors were quick to jump on the CSX bandwagon on the rumors. Also, the fact that Harrison played a phenomenal role in turning Canadian National Railway’s fortunes around before taking over at Canadian Pacific could have further fueled CSX investors’ hopes. CSX, after all, has been facing considerable pressure on its top and bottom lines — for full-year 2016, it reported 6% and 13% declines in revenue and net income, respectively, and an operating ratio of 69.4% in 2016. Just to give you an idea, Canadian Pacific’s 2016 operating ratio came in at only 58.6%. A lower ratio indicates higher efficiency.

Greater operating efficiency could be achieved through even less environmental care, not to mention paying employees less, so yes, there’s reason to be wary.

SeekingAlpha, 30 January 2017, CSX: Could Hunter Harrison Become CEO?, includes this point:

  • Harrison would likely make deep cuts to CSX’s labor costs (28% of revenue) to bring its operating ratio lower.

Lower paid employees are not going to care more about toxic chemicals.

It also includes this point:

  • If Harrison became CEO, it would likely spur the stock. CSX’s prospects are tied to coal, which is subject to vagaries of the market.

With Georgia Power and the other Southern Company subsidiaries (Alabama Power, Mississippi Power, and Gulf Power in the Florida panhandle) moving away from coal, and Georgia Power’s recent acquisition of pipeline company AGL, with its subsidiary Pivotal LNG having a deal to deliver LNG from Georgia to Crowley Maritime’s Carib Energy at Jaxport for export, and Pivotal LNG’s “construction of a new facility in Jacksonville, FL.” expected to be operationan “early 2017”, maybe CSX wants to transport some of those LNG shipping containers to Jaxport?


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