Harrison zeroes in on CSX after abrupt departure as CP's CEO

For E. Hunter Harrison and for the railroad industry that he is such a central figure in, it is déjà vu all over again.

No sooner had Harrison, 72, announced his sudden and immediate retirement yesterday as CEO of Canadian Pacific Railway (CP) than it was reported he had joined with activist investor Paul Hilal to zero in on Jacksonville, Fla.-based CSX Corp., which CP, under Harrison's direction, tried unsuccessfully to acquire in 2014.

The six degrees of separation don't end there. Until he left at the end of 2015 to start his own firm, Hilal was a partner at Pershing Square Capital Management, which was founded by William A. Ackman, Hilal's roommate at Harvard University. Pershing acquired a near 12-percent stake in CP in October 2011. Seven months later, Ackman led a boardroom coup to force out CP's then-CEO Fred Green and five other directors, and recruited Harrison, who had retired as head of Montreal-based Canadian National Inc., to run its Calgary-based rival.

Harrison, whose employment contract was to expire in June 2017, will forego $89 million in future compensation. His intentions with Hilal's firm are unclear at this time. **ital{The Wall Street Journal} reported that Harrison was close to finalizing an agreement with Hilal's firm, Mantle Ridge, to pursue CSX in some fashion.

Scott Group, an analyst for investment firm Wolfe Research, said in a note today that Mantle Ridge may have already contacted CSX's board about installing Harrison as CEO. If CSX resists, Mantle Ridge has until Feb. 10 to nominate a slate of directors and wage a proxy campaign, according to Group. Given Harrison's record of success at CN and CP, investors would likely support Harrison if they are comfortable with his plan as well as his health, Group added.

Harrison's potential involvement with CSX could set up a boardroom battle with the current CSX Chairman and CEO, Michael J. Ward, who has held both posts since 2003. Ward, a 39-year CSX veteran known to be as demanding and hard-nosed as Harrison, is believed to have been asked by the board to stay on for another three years.

This would mark the second time in five years that Harrison would be involved in turning around what is perceived as a rail laggard. At CP, Harrison dramatically cut costs and boosted operating efficiency, driving down the railroad's operating ratio, which measures a rail's revenues versus its expenses and is considered a key metric of its efficiency. CP posted a 2016 operating ratio of 58.6. CSX's 2016 operating ratio stood at 69.4; it has targeted a mid-60s ratio for the long term.

News of Harrison's purported involvement sent CSX stock climbing 23 percent, its best one-day performance in 36 years. CSX stock closed today at $45.51 a share, up $8.63.

Harrison has long called for consolidation of the North American railroad industry, maintaining that it is the only path to alleviating traffic congestion and to sustainably improving service, which has been criticized by shippers as erratic. Two days after being rebuffed by CSX, Harrison told analysts, investors, and others logged on to a one-person conference call that "we are fast approaching a time where none of this works" unless railroads have the ability to maneuver freely without regulatory interference.

CP subsequently made an unsuccessful $28 billion bid for CSX rival Norfolk Southern Corp., during which time Harrison and CP faced almost universal criticism for attempting to further consolidate an industry that many feel has shrunk enough. Even today, as word circulated that Harrison and Hilal may make a play for CSX, Lance Fritz, chairman, president, and CEO of western railroad Union Pacific Corp., told Reuters that further industry consolidation would not be a good idea.

Keith Creel, CP's current president and COO, has been named CP's CEO to succeed Harrison.