Who walks away from $118-million?
The answer, obviously, is former Canadian Pacific Railway CEO Hunter Harrison, who just gave up a generous retirement package, at the age of 72, to team up once again with fund manager Paul Hilal and attempt to turn around a rival railway, CSX Corp.
If you need a testimony to the wealth that can be generated by activist investors, look no further than Mr. Harrison. He's giving up the certainty of a pension, stock options and perks from CP. He's getting nothing guaranteed in return. Instead, Mr. Harrison is wagering, once again, on his ability to change an entrenched corporate culture, with backing from Mr. Hilal's newly launched activist fund, Mantle Ridge LP.
Mr. Harrison's camp has already made significant money on this risky move. Mantle Ridge committed $1-billion (U.S.) to an investment and CSX stock soared 22 per cent Thursday on news the veteran railroader may be coming aboard. Assuming it was all invested prior to the news, the fund would be up $220 million.
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Fortunes are occasionally created by entrepreneurs with one great idea, but most successful businesses are built by executing a simple strategy, over and over again. That's Mr. Harrison's shtick. As CEO, he made sure the trains ran on time at three railways – Illinois Central, Canadian National Railway and CP – and each time performance improved, the stock price soared.
Mr. Harrison was enticed out of retirement and into the top job at CP after a cold call from Mr. Hilal, a former partner in hedge fund Pershing Square Holdings Ltd. While founder Bill Ackman gets all the headlines at Pershing Square, the fund's hugely successful CP investment was Mr. Hilal's baby. He championed the investment – he got the idea from his fund-manager brother, who passed on shareholder complaints on CP's poor performance – and Mr. Hilal was on the railway's board for four years, stepping down last January at the same time he left Pershing Square.
In October, 2016, Mr. Hilal launched New York-based Mantle Ridge – the name is meant to reflect the "mantle of great responsibility" that comes with investing on behalf of clients. The fund and its backers plan to invest in CSX for up to five years, according to a person familiar with the situation.
CSX directors are expected to meet with Mantle Ridge and Mr. Harrison to discuss the railway's strategy; it's not clear if the discussions will be friendly or frosty. At CP, Mr. Hilal needed to win a proxy battle to install Mr. Harrison as CEO. However, the sharp upturn in CSX's stock price shows investors believe the Jacksonville-based railway is on track for better results.
Here's how the numbers might work at CSX: At CP, Mr. Hunter and his team made efficiency a priority and doubled profit over three years. Applying the same rigour to CSX could boost profit by 40 per cent and increase the railway's share price by that much or more, according to a report Thursday from Barclays Capital.
The hot topic now is where this ride will end: As CEO of CP, Mr. Harrison consistently pushed railway mega-mergers. While sources close to both Mr. Harrison and his backers say the thesis of the investment in CSX is based on operational improvement, not acquisitions, the prospect of a big deal to end Mr. Harrison's career seems like a storybook ending.
"We could not understand why even a wealthy individual such as Mr. Harrison would forgo a sum so large from CP in return for merely a chance at driving change at an even larger railroad," said a report Thursday from analyst Brandon Oglenski at Barclays. "In fact, we think Mr. Harrison likely sees a high probability for effecting change at an eastern rail or even pursuing his long-stated goal of a coast-to-coast railroad merger."
By leaving serious money on the table at CP, Mr. Harrison is signalling he expects to make even larger returns at CSX. He can achieve that with the same game plan that's worked in the past – improving performance will boost CSX's share price. But transforming CSX into the dominant North American railway – a goal that could be achieved by acquiring CP or another top-tier rival – would generate outsized returns: The customer clout and potential synergies are enormous. For Mr. Harrison, one last ride on a railway may be his most lucrative gig.
Andrew Willis