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American ShipperShipping

CSX names former CN, CP CEO Harrison to top spot

The appointment of outgoing Canadian Pacific Chief Executive E. Hunter Harrison as CEO of Class I railroad CSX is still contingent on a shareholder vote over $84 million in benefits and equity awards he forfeited by leaving CP six months ahead of schedule.

   Despite a highly public and at times contentious negotiation process with hedge fund Mantle Ridge LP, CSX Corp. has named outgoing Canadian Pacific (CP) President and Chief Executive Officer E. Hunter Harrison its next CEO, according to a statement from the company.
   Harrison succeeds Michael Ward, who will retire immediately as chairman and CEO of the Jacksonville, Fla.-based Class I railroad and remain with the company in a consulting role.
   Also a former president and CEO of Canadian National Railway (CN), Harrison signaled his intent to take over the top spot at CSX back in January, stepping away from his post at CP six months ahead of the previously announced schedule and forfeiting millions in benefits and equity awards in the process.
   He then teamed up with activist investor Paul Hilal, who’s firm bought a 4.9 percent stake in CSX and began negotiating to position the veteran railroad exec as its next CEO. Hilal knows Harrison well from his time at billionaire Bill Ackman’s Pershing Square Capital Management, which won a proxy fight to install Harrison as CEO at CP in 2012 following the firm’s acquisition of a minority stake in the company. Ackman’s college roommate and a former CP board member, Hilal left Pershing Square in January 2016 and started Mantle Ridge in November.
   Talks appeared to be proceeding amicably, but stalled over issues of compensation and company governance. The primary points of contention were the number of board seats CSX would grant the fund and an $84 million payment to Harrison to recoup the lost benefits and equity from CP.
   As part of the agreement to install Harrison as CEO, CSX said it will appoint five new mutually agreed upon directors to its board—Harrison, Hilal, Dennis Reilley, Linda Riefler, and John Zillmer—and three existing board members will step down. In addition, current Presiding Director Edward J. Kelly, III will become chairman of the CSX board and Hilal will become vice chairman.
   A former chairman, president and CEO of Praxair, Inc., Reilley currently serves as non-executive chairman of Marathon Oil Corp. and a board director of Dow Chemical Company, and is a founding member and partner of Trian Advisory Partners. Riefler is a 25-year veteran of Morgan Stanley, where she served on the firm’s executive and management committees, and as chairman and global head of its research division. And Zillmer is the former chief executive of Univar, a Fortune 500 company, and currently serves as a board director for Reynolds American, Inc., Ecolab Inc., Veritiv Corp., Performance Food Group, and Liberty Capital Partners, as well as on the North American advisory board of CVC Capital Partners.
   There is, however, still the question of compensating Harrison for the benefits and equity awards he forfeited by leaving CP early.
   CSX contends that Mantle Ridge agreed to reimburse Harrison prior to beginning discussions about installing him as CEO, but the fund has asked that the cost be rolled into Harrison’s greater compensation package. Shareholders will make the ultimate decision with regard to the additional $84 million owed to Harrison, which means the fate of the entire agreement still rests in their hands.
   According to CSX, Harrison has informed the company that his acceptance of the CEO position is conditional on “CSX ultimately providing this replacement protection initially offered by Mantle Ridge upon his departure from CP. Mr. Harrison has indicated that he will resign after the 2017 annual meeting if the reimbursement and tax indemnity are not provided by CSX, and return to Mantle Ridge to protect his reimbursements.”
   As such, the company has cancelled a previously announced special shareholder meeting and will ask shareholders to to vote on the matter at its 2017 Annual Meeting on March 10. CSX said the board of directors will not recommend a vote for or against the proposal, but “does intend to act promptly following the meeting based on the outcome of the vote.”
   Harrison has long been an advocate for consolidation in the North American railroad industry, and analysts have already begun to speculate as to his intentions with CSX. Under Harrison’s guidance, CP in late 2015 and early 2016 engaged in a highly public, albeit unsuccessful, takeover attempt of fourth-largest U.S. railroad Norfolk Southern after previously attempting to merge with CSX in 2014.
   With Harrison’s protege and current Chief Operating Officer Keith Creel taking the reigns at CP, some have posited that a merger between CP and CSX could be in cards should Harrison be installed at CSX. 
   Whether shareholders will vote to approve Harrison’s reimbursement, however, let alone support a potential merger, remains to be seen. And any deal would still be subject to approval from the U.S. Surface Transportation Board and the relevant regulatory authorities in Canada.
   One of only seven remaining Class I freight railroads in North America and the largest operating on the U.S. East Coast, CSX operates a network of roughly 21,000 route miles of track in 23 states, the District of Columbia and the Canadian provinces of Ontario and Quebec.
   The company in January reported net earnings of $1.7 billion on $11.1 billion in revenues for 2016, year-over-year declines of 13 percent and 6 percent, respectively, as volumes fell 5 percent from 2015 levels.

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