CSX shareholders seek clarity

Stock stabilizes after CEO’s sudden death

CSX Corp’s stock stabilized on Monday in a sign of confidence that acting Chief Executive Officer Jim Foote can steer the No. 3 U.S. railroad in the short-term, following the sudden death of the firm’s CEO on Saturday.

However, analysts and investors said longer term a more experienced executive may be needed to implement the complex turnaround plan begun by deceased CEO Hunter Harrison.

Harrison’s death at the age of 73 came just eight months into his dramatic restructuring campaign designed to boost profits and streamline operations through cost cuts and operational changes. These changes also triggered service disruptions, customer complaints and federal scrutiny.

CSX shares have risen about 48 per cent this year and about 6 per cent since March after Harrison, who led turnarounds of two Canadian railroads, was hired in a high-stakes push by activist investor Paul Hilal of investment fund Mantle Ridge LP.

Shares fell around 10 per cent on Friday after CSX said late on Thursday that Harrison would be taking medical leave. But by Monday afternoon they pared some losses, ending the day up 1.25 per cent to US$53.59 on the day.

CSX chair Edward Kelly said in a statement on Saturday that Harrison’s death was due to unexpectedly severe complications from a recent illness, calling it a major loss to the company.

Harrison used an oxygen tank when he met investors last month and also at a regulatory hearing in October. He had previously taken medical leave from Canadian Pacific Railway Ltd. in 2015 after surgery and a bout with pneumonia.

Given his medical history, CSX’s board initially asked for an independent physician to review Harrison’s medical records. Harrison refused, providing instead a letter from his doctor saying he was fit for the job, the company said.

Two corporate attorneys said investors would have a difficult time successfully suing the board over breach of duty, given Harrison’s known medical history.

Investors and analysts questioned whether Foote would be the long-term choice to run the company given his primary expertise is sales and marketing, rather than operations.

Foote is familiar with Harrison’s working style from when he worked under Harrison during the turnaround of Canadian National Railway Co., but has been with CSX for about two months and has never headed a major railroad.

“I do expect Jim to be named CEO, although I also think the board will proactively study (and look to fill) any gaps in the team,” said Taylor Glasebrook at Neuberger Berman, the No. 8 shareholder in CSX with 10.5 million shares.

“The next opportunity for management to calm investors is in January when they report the year-end results,” Glasebrook said.

Foote told investors on Friday he believes the “real heavy lifting has been done” and there will be “modifications and changes that we will make.”

“Even though Jim Foote is a capable leader we do not see him as the long-term solution as the CEO given his strength is marketing and the company is embarking on an operations-focused turnaround,” Cowen and Co. analyst Jason Seidl said in a note.

Some investors were using the volatility to look at the possibility that CSX could become an acquisition target. “People are definitely taking out their notebooks and doing the math that CSX becomes a takeover target,” said one CSX investor who asked not to be named.