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February 17, 2017 8:15 AM, EST
CSX Shareholders Seen Likely to Make Harrison a $300 Million Man
Norm Betts/Bloomberg News

CSX Corp. shareholders are likely to approve turnaround veteran Hunter Harrison’s demand for a $300 million pay package that the railroad derided as “exceptionally unusual,” according to analysts.

Investors will be asked to vote on an employment deal and board representation sought by activist investor Paul Hilal and Harrison, who is seeking to become CEO. CSX’s directors welcomed Harrison’s bid to become CEO but balked at the board and compensation demands.

“Odds remain in favor of a change that would usher in the leadership of Hunter Harrison,” Fadi Chamoun, a BMO Capital Markets analyst, said Feb. 15 in a note to clients. “It seems to us that shareholders have already voted for this change and stand to see significant downside in the absence of a deal.”

Harrison, 72, and Hilal last month targeted CSX, the least-efficient North American railroad, for a shakeup, taking a page out of the playbook they used with hedge-fund billionaire Bill Ackman to turn around Canadian Pacific Railway Ltd. Harrison stepped down as CEO of the Canadian carrier ahead of schedule, forfeiting more than $80 million in compensation and revising a noncompete agreement so he could run CSX.

CSX’s board “believes that the governance requests would grant effective control of CSX to a less than 5% shareholder,” the Jacksonville, Florida-based company said Feb. 14 in a statement. As for Harrison’s compensation proposal, it said, the “extraordinary” request would be “exceptionally unusual, if not unprecedented” for an incoming CEO.

Hilal said he is “fully confident’’ in a favorable outcome for the company. Optimism that Harrison will become CEO has fueled an increase of about $10 billion in the railroad’s market value, Hilal said.

“While we had hoped to reach a negotiated agreement, we appreciate that CSX shareholders will have the opportunity to make their voices heard on the optimal governance and compensation structure that will create the conditions for a successful transformation,’’ Hilal said by e-mail. Harrison couldn’t be reached for comment.

Harrison may be installed by the end of April, said Citigroup Inc. analyst Christian Wetherbee. CSX shareholders will likely view Harrison’s compensation “as worth the potential for a 58% operating ratio,” Wetherbee said. CSX’s ratio — a measure of efficiency in which a lower number is better — was 69% last year, the highest among large North American carriers.

The shares fell less than 1% to $47.72 at 11:37 a.m. in New York. CSX had gained 34% this year through Feb. 14.

Hilal’s fund, Mantle Ridge, covered the Canadian Pacific pay that Harrison abandoned and now wants CSX to pick up the tab, the U.S. railroad said. Under the Mantle Ridge proposal, Harrison would receive other compensation including an “immediate equity award” covering 1% of CSX’s stock. The company said it’s willing to offer a package that “that fully reflects Mr. Harrison’s experience and accomplishments,” without specifying amounts.

The special meeting, the date of which hasn’t been announced, is for investors who own shares as of March 16. CSX’s annual shareholders meeting would be held afterward. While the company questioned the pay package and governance proposals of Harrison and Mantle Ridge in its statement, it said the board wouldn’t recommend for or against them.

Negotiations included a meeting between the full CSX board and Harrison and Mantle Ridge that lasted more than five hours, CSX said. In an e-mail dated Feb. 6, lead director Edward Kelly said, “We would be pleased to appoint you as chief executive officer of CSX.”

Both sides agreed that Mike Ward would step down as CEO and chairman of the board. CSX said it was willing to add five new directors, including Hilal and Harrison, expanding the board seats to 16. Four board members would subsequently step down. Mantle Ridge is seeking to name six directors to a board that would be increased to 14 seats, CSX said. Hilal would succeed Kelly as chairman after a year and the plan calls for additional retirements of other incumbent directors.

Goldman Sachs Group Inc. and UBS Group AG are serving as financial advisers to CSX. Davis Polk & Wardwell and Hunton & Williams are legal advisers.

CSX would be Harrison’s fourth railroad to run in a career he started as an 18-year-old employee lubricating train wheels. Earlier in his career, he was CEO of Canadian National Railway Co., now the leanest North American railroad, and Illinois Central.

Under Harrison, Canadian Pacific’s annual operating ratio plummeted to less than 59% last year from 83% in 2012. Over the period, net income more than tripled to about C$1.6 billion ($1.2 billion) last year from C$484 million in 2012.